MILANKA SLAVOVA
University of National and World Economy, Bulgaria
Summary
Using a network tool specifically designed for use in analysing agri-food supply chains, the paper presents an original case study of the Bulgarian wine industry, from which it draws public policy and business suggestions and conclusions. It tracks how of how viniculture, vinification and wine sales operate as a network and how networks migrate from producer and national goals and governances towards a market and international orientation.
Key words: agri-food, Bulgaria, wine, network 1. Introduction
It is fitting that one of Bulgaria’s ancient treasures, the 7th century goblet of Kubrat; Khan of Great Bolgary is vessel for drinking wine. Since the early Bronze Age, Bulgarians made the wine in Thrace that Homer praises in the Iliad. Bulgaria’s long association with wine making is evi-denced in a second-century law protecting vineyards, a ninth century prohibition law and its early medieval monastic wine cellars (e.g. Pliska, Perusal and Turnoff). Vinology prospered even dur-ing Ottoman period (Stavrianos 2000), especially sweet whites.
This paper follows many tracks. At one level recent vicissitudes in Bulgarian wine making is iconic of represents the determination of a whole people/country to engage in modernisation proc-esses. This is also the story of transition from Soviet planned economy to globalised market econ-omy participation; shifting from quantity to quality and from closed to open markets. At an iconic level, it is the story of national product repositioning from cheap and cheerful to premium and boutique. In the story heroic actors and determined people feature alongside EU-quotas, tariffs, quality standards and branding campaigns. In short, the success story of Bulgarian wine making is multidimensional. This paper analyses these changes using an institutional perspective – network theory.
One important dimension is the understanding of how viniculture, vinification and wine sales operate as a network and how networks migrate from producer and national goals and governances towards a market and international orientation. Network here is a purposively interconnected group of businesses and their partners enjoying untraded interdependencies in the form of network externalities (Häkansson 1989). Supply networks presume a value upon relationships (including knowledge flows and costs) that exceeds the transaction costs of network participation (Lamming 1993; Kinder 2002). This paper references Fisher’s (1997) classification of traditional (functional) and innovative supply networks as a key concept to analyse changes in the Bulgarian wine
indus-try. As Spekman, Kamauff and Myhr’s (1988) point out, increasingly competition is between sets of networks: this is clearly visible in wine sales.
Industrial clusters are a particular type of network (Kinder and Molina 1999) characterised by a shared paradigm guiding searches for solutions (technological or social); are composed of or-ganisations open to learning (especially from each other); enjoy institutional thickness – support-ing capacity and competences (Storper 1997 and Amin and Thrift 1992); and often benefit from being spatially proximate, forming territorial production systems (Stöhr 1987). Bulgaria’s wine industry is not a cluster – though clustering occurs in localised settings, led by major companies. Bulgarian viniculture, vinification and associated logistics do not share a technological paradigm (some firms are highly mechanised others labour intensive). Firms vary greatly in their prepared-ness to cooperatively diffuse learning amongst other Bulgarian wine industry firms (some are secretive and non-cooperating). These firms are dispersed throughout the country and in impor-tant regards lack institutional thickness: especially in access to marketing expertise, risk capital and export services. This paper, therefore does not use the clustering framework of analysis, rather it conceptualises the wine sector in Bulgaria as a loose industrial network: loose in the sense that whilst there are shared interests (EU quotas, fiscal policy), such is the differentiation between innovative and traditional firms and sub-sectors (wine quality, type, target market or price) that the network has been and remains loose.
There is little academic research on recent change in the Bulgarian wine sector. Whilst refer-encing the sector, Zaharieva, Gorton and Lingard (2003) focus on privatisation processes rather than business change and organisation within the sector. Davidova, Tangermann and Tosheva (1994) is an informative piece on governance shifts in the sector, illustrated by procurement. Their analysis uses a transactional, firm-to-firm approach, which though commenting upon the wider strategic and organisational issues facing the sector, does not focus upon them. Bainbridge and Roe (1994) and Bainbridge (1999) draw upon a dated data set and though incisive cannot inform current business strategy making. Our paper draws freely from the detailed exposition in Noev and Swinnen (2002) and Noev (2006). The strength of Noev’s papers is meticulously rigor-ous research; they are not however as strong in presenting an analytical framework, giving causal relationships suitable for prediction and strategy-making.
Taking an institutional perspective entails using network analysis to examine causal connec-tions that feed into practical business strategy-making and to a lesser extent public policy making. Significant changes in technological processes have occurred in Bulgarian wines since 1989; the network approach captures these and organisational change (especially changes service and rela-tionship models), locating them within an evolving set of institutional arrangements (law, finance, labour markets, regulatory regime), each of which features in our analysis.
Figure 1 indicates the basic structure of our network analysis. We are looking for evolving network boundaries and deepening of relationships with the Bulgarian wine network.
As complex a story as that of the Bulgarian wine network is one in which numerous moments or events might be seen to characterise new phases. The time-framing of our analysis is dictated by the use to which the analysis is put: to comment on the future strategy of the network. In figure 2 we give a general overview of events and changes affecting the network. Our analysis, however, is structured in three phases: the period prior to 2003, the period after 2003 and the future. The year 2003 is chosen as a significant business disjuncture, since as we shall show, at this point pre-vious decisions began to crystallise results and market opportunities altered. It is also sufficiently close to the present to be relevant to current business strategy.
The paper’s overall intention is to illustrate the relevance of network analysis to an under-standing of network migration and to contribute towards strategy making. In particular we hope to show why and how the Bulgarian wine network evolved since 1989; the extent to which is has become an innovative rather than traditional network and to suggest what this may mean for its future strategy.
Parameters Network organisation characteristics Control/ownership Possibly shared ownership and assets with the network? Governance Interdependency of systems and process with network
in-cluding cross-institutional arrangements e.g. public-private? Purpose and goals Explicit, shared and collective goals?
Hierarchy Structures: flat, facilitating discourse and unmediated com-munications?
Leadership Led by specialists with the knowledge and ability to envi-sion, communicate and operationalise change
Functional integra-tion
Functionally integrated and user-orientated, avoiding verti-cal integration and uses commitment-based human rela-tions?
Products Project rather than programme focus creating customised outcomes, targeting emerging markets and stakeholders? Ecology Inter-relationships between communities of practice? Trust Long-term trusting relationships based upon mutual
advan-tage and including knowledge flows?
Risk Risk syndication via networks encouraging and supporting high risk taking
Figure 1: Characteristics of the networked organisation Source: Kinder 2007
9ROXPH WRQQHV /RZTXDOLW\RYHUFDSDFLW\ 2YHUFDSDFLW\HQGV 9RODWLOH
%RXWLTXHVDOHVULVH
9DOXH +LYROXPHORPDUJLQ 'HFOLQHLQSUHPLXPVDOHV 5LVLQJORZSULFH GRPHVWLFVDOHV
1HZYLQH\DUGV\LHOGLQJ
([SRUW 5XVVLD %9&OHGH[SRUW ([SRUWGHFOLQHV &ULVLVLQ +LYROXPHORZSULFH
((XURSH 5XVVLD WR5XVVLD3RODQG
/RZYROXPHKLSULFH LQWR(8
,QVWLWXWLRQDO 3RRUTXDOLW\ 1HZYLQH\DUGSODQWLQJ 1HZODZV
DUUDQJHPHQWV ODUJHYLQH\DUGV
6XEVLG\ 'RZQVL]LQJ (5')LQYHVWPHQW )',LQIORZV
3UH 22 2 2 2 2 2
<HDUV
Figure 2: basic timeline of recent Bulgarian wine network
Section two of the paper sets out our method. In section three we present a case study of the Bulgarian wine network, which we analyse in section four and from which we draw con-clusions.
3. Development prior to 2003 - quantity
Most regions of Bulgaria, which measures eleven million hectares (42,823 square miles), enjoy favourable conditions for viniculture. The north, bounded by the Danube, Dobrudzha Valley and Serbia/Montenegro grows both red and white grape; the local Gamza along with Cabernet Sauvignon and Merlot; Chardonnay, Riesling and Sauvignon Blanc. Eastwards to-wards the Black Sea coast mainly white grapes are cultivated including the local Misket and Diamiat varieties. Microclimates in the south-eastern valleys, in which the Slavjantzi winery is located, grow local varieties such as Sunguriare Misket, Sunguriare Eau deVie. Towards the south, near the border with Greece, Mediterranean conditions especially in the Tracian valley favour mainly reds: Cabernet Sauvignon and Merlot. Finally, towards the border with FYR Macedonia in the southwest (home to the famous Damianitza winery), along the Struma valley, Cabernets flourish alongside local varieties such as Melnik. Figure 3 shows the size and distribution of vineyards and wine production in 2003.
Vineyards in ha (hectares) Grapes (tonnes/1,000 kgm) Wine in ha/l (hectolitres) Northern regions 35,850 68,210 514,300 Southern regions 58,900 177,900 1,035,000
3.1. Purpose and goals
Prior to 1989, Bulgarian wine served the domestic and Russian markets with high-volume, low quality and low cost products. In total, production in post Soviet transition states was 10% of world output and Bulgaria, like other transition states viewed wine as an exportable product, capable of generating hard currency (Noev and Swinnen 2004). Wine was also a stable domes-tic beverage, but sales proved volatile and declined dramadomes-tically during the 1990s. There are several reasons for this including declining real incomes; black market production; rising ex-cise duties; higher prices and shift to beer especially amongst poorer people. Another factor was declining grape quality and yields: vine-massif had been labour intensive and cost pres-sures further eroded viniculture quality. Many vineyards were (and are) 30% below pre-1989 grape yields. Only with the planting of new vineyards and modernisation of vinification (cou-pled with rising incomes) did volume (domestic) sales rise towards the turn of the century. Exports based upon low price branding proved fickle, bottled wine exports into Russia stalled in 1998 with the financial crisis in that country, rejuvenating only after the turn of the century (Davidova et al 1994).
3.2. Control, ownership and governances
For the 46 years of the Soviet period, the Bulgarian wine industry was controlled by state agencies for domestic production (Vinprom) and export (Vinimpex). In the late 1970s, Vin-prom realised that obtaining hard currency meant shifting some production from quantity (table wines) to quality and allowed three wineries to become independent (Perushtitza, Targovishte and Septemvri), nevertheless, in 1989, Vinprom continued to control 80% of wine production. Immediately Vinprom was disbanded in 1990, it resurrected itself by offering contract to all wineries, in effect becoming a private (supply) monopoly. Wineries became recipients of hard currency and foreign buyers sought to directly buy grapes. However, this UK-led export drive was short lived as consistency of quality proved difficult. By the mid-90s this model was over.
By 2000, the state had divested most agricultural land in Bulgaria into small individual parcels or co-ownership (40%). Buying or leasing land is therefore a complex, costly and time-consuming task. Zaharieva et al (2003) report one case in which the builder of a 228 ha vineyard had to negotiate with 680 landowners. In no country are property leases and planning consents as easy as leasers or purchasers wish. The extent of the difficulties remains an impor-tant constraint on building new vineyards in Bulgaria.
3.3. Hierarchy and leadership
Vinprom established a regional network of wineries, cross-subsidised to keep the less effi-cient open and established quality standards (the French Appellation d’Origine Contrôlé ranges from AC (highest) through country wine to table wine. Bainbridge (1999) wrongly suggests that Bulgarian Controliran system has three categories: reserves, country wine and table wine. In fact there are five categories reserve (oak aged); controlled appellation origin (2% output, defined vineyard and sugar); declared geog origin (70% of quality wine); regional or country wines (c.f. vin de pays – 18% quality wine output); and wine without declared origin (5% output; declared quality or brand). This framework was established in law, adopted in 1999, helping the later re-entry to EU markets, this time with premium products: the result of pres-sure from the Association of the Producers and Merchants of Wines and Spirits of Bulgaria.
3.4. Products and functional integration
Post-Soviet Bulgarian wine inherited the high-volume, low cost model of the Soviet ear and was temporarily successful in marketing the Bulgaria brand internationally as cheap and cheerful, selling varietal wine (country than vineyard designation. The varietal model contin-ues to be used by some wineries in the US, Australia and New Zealand. In these three coun-tries, grape quality was more assured than proved the case in early-1990s Bulgaria. During the decade older vineyards have been withdrawn from the value chain (reducing over-capacity) and new ones laid. By 2001, 3% of vines were young (under 5 years old), 13% are 5-10 years old, and 22% are between 10-15 years old. Many of the newer vines are local grapes, for pre-mium-priced boutique wines. Still, in 2001, 62% of vines were over 15 years old and the ratio between the uprooted vineyards and the newly planted around 8 to 1.
The Ministry of Agriculture and Food Supply (2006:114) indicates that of 351,468 tons on grapes produced in 2005, 312,808 ton were processes, some 182,800 by commercial concerns. They report a 7% decrease in yields. In parallel with industrial restructuring, capacity in Bul-garia’s wine network was also reduced by lowering grape yields and growth of (black market) non-commercial wine production.
3.5. Network ecology
In 1980, seeking hard currency from exports, Vinimpex established the Bulgarian Vintners Company (BVC) in London to promote exports under the value-for-money Bulgarian brand using Cabernet Sauvignon grapes. The 95,000 cases exported in 1982, rose to 1.5 million by 1989 (Bainbridge and Roe 1994). By 1990 exports to into the EU had halved.
Margarit Todorov as BVC manager, used his position to encourage the import of vinifica-tion technology from Australia and the US and to shift producvinifica-tion away from sweet table wines to above-average price Cabernet Sauvignon to become the fourth largest exporter of wine into UK. Despite reducing the need for state subsidy and funding some investment in vineyards, the discounter’s position is always precarious and short-term. In this case, disruption came from the unexpected source: suddenly in 1989, as consequence of anti-alcohol campaigns, BVC’s activities were curtailed - though Todorov later formed the successful Domains Boyar company – marketing orientation. Todorov’s insight, that shifting to new markets, with pre-mium products (relative to Bulgaria’s home markets) backed by marketing initiatives remains apposite (Vintellectual News 2006). With exports slumping (even further with the Russian economic downturn) and domestic demand waning, Bulgarian wine effectively withdrew from the ecology of international wine networks.
By the end of the 1990s, restructuring within the internal Bulgarian wine network was dis-cernible. All wine-processing assets were private property, though the stream of foreign direct investment commenced only later. Domaine Boyar and Vinprom-Rousse Seabord merged to create Boyar Estates, establishing a quality standard and best practice example of both logistics and the coupling of production with marketing. By the end of the 90s decade much of the over-capacity was taken out of the network as vineyards and wineries ceased to trade. Boyar’s four large wineries used advanced vinification technologies setting competition standards for other producers.
3.6 Trust and risk
The period between 1989 and 2003 (when domestic and premium export sales began to strengthen) was difficult for much of Bulgarian: many of the new viniculture and vinification firms faced with rising indebtedness, negative profitability and withdrawal of subsidy and declining quality, simply withdrew from the market. Only after a process of restructuring had eradicated over-capacity, infrastructure and institutional arrangements improved, did foreign direct investors invest in the Bulgarian wine network, beginning at the turn of the century and strengthening by 2003. Beginning in the late-90s, the European Regional Development Fund (ERDF) actively supported network restructuring, providing loans (unavailable from private sources) for replanting mechanisation investment and in some cases land purchase and fertili-zation. In some cases (e.g. Damjanitza), ERDF gave credit secured against future income streams, though this was exceptional. Private investors held back until the legal framework for investment improved, over-capacity reduced and infrastructural investment begun.
Thus, the withdrawal of tradition network support arrangements (subsidy in one form or another) exposed Bulgaria’s wine network to risk and many vineyards and wineries did not survive. Those that did, after 2000 and certainly by 2003, face a more auspicious future with rising domestic and international demand for premium-priced high volume and niché products. 4. Migration after 2003
After 2003, the Bulgarian wine network began to benefit from its migration from a dis-count to a premium-price provider in export markets and high volume supplier to a strengthen-ing domestic market. In this sense, the turnaround for the Bulgarian wine network happened a year before accession (2007), making it well-placed to meet the challenges posed by accession.
Production in 2005 at 1,857,000 hectolitres of wine was 29% higher than the 2003 figure, with penetration of premium (relative to domestic prices) products into Russia, Poland, China and Eastern Europe (CEE 2006). Export volumes remained static, whilst unit value rose. 4.1. Purpose and goals
The Bulgarian wine network entered 2003 sufficiently strong for the challenge of meeting three market needs.
• The rising volume but low-price home market, where at 2.49 Leva per bottle (€0.51) vol-ume is critical, especially exploiting the growing supermarket distribution channels. • A growing premium priced market, both at home and abroad (especially the UK and
Ger-many), including niché products from local grape varieties and small wineries and high-value sales in Bulgarian restaurants - the favoured strategy of Bulgarian enologists, local grape viniculturalists, boutique winery owners and vintners.
• The medium price range export markets in the former Soviet countries and China.
Having spent the 1990s restructuring, the Bulgarian wide network faced the challenges of EU accession with self-confidence. Though the Golden Rython (highest award) at the 2006 Vinaria exhibition went to Sakar Luibimetz for a Cabernet Sauvignon Merlot, most gold med-als went to small wineries using newly plant local grapes.
4.2. Control, ownership and governances
Production increased after 2003; by 2006 grape output was 302,076 million tonnes (MT), over 20% up on 2005, with quality improving every year. For example, 23% of grape produc-tion was Merlot, whilst Cabernet was only 16%. In whites, the largest output was Misket, 33,000 MT, followed by Rkatziteli, 32,000 MT and Muscat Otonel, 20,000 MT. Operational wine producers had declined to 174, creating 171 ML in 2006 – up 11% from the previous year. Of this, 11.2 ML were quality wines – 20% up from the previous year. Though most of the 73,000 vineyards in 2006 are over twenty-years old (135,600 HA) 7,200 new vineyards were planted that year (often using the € 34 million EU aid via SAPARD).
There is an increasing effort by the industry to find its own new unique market niche on the global and EU market. For this reason, new wineries prefer to invest in local vine varieties that are not grown in other countries, such as Rubin, Mavrud, Melnik, Gumza and Shevka seeking to establish branded labelling.
Land ownership fragmentation continues to haunt those building new vineyards. The al-ternative for wineries is sourcing grapes from the farms of others: some 90% of grapes are externally sourced. Aside from yield continuing to fall below 1989 levels
4.3. Hierarchy and leadership
LVK Vinprom Targovishte AD remains the market leader in Bulgaria with 12% supported by its sophisticated distribution network and quality standards. Other large wine companies include Domain Menada Sp zoo and Vinprom Yambol. Vinprom Yambol and SIS Industries are strong in lower priced wines. Domain Boyar’s Sinite Skali plant in Sliven is a state-of-the-art automated, modern operation.
As Bulgaria’s wine network’s self-confidence has increased, its leaders increasingly fol-low the lead of enologists by using local grapes to create smaller-volume, high-quality bou-tique wines. Production in 2005 exceeded 1.5 million ha/l some 1.5% of wine sold, though figures are uncertain and the segment is expanding rapidly and at boutique prices, amounts to 20% of sales by value.
• An example of a boutique is Todoroff Winery in Brestovitsa, branded as Teres and Todoroff Galery, which now produces 440,000 bottles per year and is listed on the Bulgarian bourse (offering 25% of shares in an IPO to invest in new vineyards. It has two cellars, 2 thousand decares of vineyards and specialises in the Mayround grape fa-voured in premium restaurants.
• Bessa Valley in Ognianovo village is branded as Enira and led by a French wine en-trepreneur. It produces 1,000 tonnes annually and retails at between €7 and €30. Wine making is a patient investor business, with most of the cost upfront. The €600,000 necessary to create a boutique winery making 200,000 bottles a year, is unlikely to give a re-turn on investment for around seven years, with pay-back at double that time. Nonetheless, this is a low market entry cost for a premium and long product life-cycle product. Other play-ers are entering by buying existing wineries (e.g. the Bobokovi brothplay-ers, who trade wine under the Levent label). Existing players, such as Domain Boyar are seeking to move up-market into higher quality products. Boutiques are targeting export markets, with the costs/risks associated with market entry and marketing. Bulgaria itself has few outlet channels for boutique wines
(e.g. specialist wine stores).
4.4 Products and functional integration
Like all industrial sectors in Bulgaria, the wine network is benefiting from infrastructure improvements to roads and telecommunications that support modern logistics. For the wine network, in some cases, this helps break the historic links between local vineyards and winer-ies.
Distribution channels inside Bulgaria of on-sales are benefiting from the growth of hypermarkets, discount stores, supermarkets, specialized wine stores and chains, and special-ized wine bars and wine restaurants.
In 2007, some retail chains introduced customs bottling at certain EU cellars to reduce fi-nal cost. Another import into the domestic wine network is the use of PET (terephthalate) packaging. Much less expensive than glass bottles, the experience from the US and UK (Sainsbury’s) is that PET cartons and “bottles” lower costs and increase sales. Some 50% of red and 40% of whites are sold in PET packaging in Bulgaria.
4.5. Network ecology
Total wine exports in 2006 were 113.3 ML (€130 million) up from 114.5 ML in 2005 (€95 million). Russia remains the largest export customer, with 73 ML, followed by the EU with 33.5 ML (often higher priced products). Bottled wine exports have risen from 2004 (70,555), to 88,964 in 2005 and 90,958 in 2006.
Self-confident networks invariable reach outwards and play wider roles with other net-works. One result of renewed exports into the US is a succession of awards, especially for local grape wines.
The major alteration in the network ecology facing Bulgarian wine since 2003 has been EU accession. Two areas (quality and quotas) featured in SWOT threats boxes prior to 2007.
EU regulations governing quality, sanitary and hygiene (HACCP) are a major issue for all access country’s food chains. There are few wineries in Bulgaria certified to EU standards, although large part of the production of wine is exported there and no agreement to delay com-pliance. To date, quality certification is based on a non-inspected, Bulgarian Government accreditation. Developing locally competent training and accreditation centres remains an important challenge for the Bulgarian wine network. EU quotas appeared problematic and the subject of negotiation around relevant base year and levels of subsidy in existing member states. Former Soviet states were given the option to agree tariff bindings above actual tariff levels (EU level is €32/hl) and Bulgaria choose at 40% + €80/hl level, reducing over time to 25% + €51/hl. In part, Bulgaria chooses this course to speed up its accession into the WTO. This does mean that in some cases competition in EU markets is against wineries enjoying national government subsidy. A further effect is persistence of black market importation. Domestic sales in Bulgaria have long been distorted by heavy reliance on black market wine in outdoor markets and independent stores, which had been spurred on by a negative response amongst consumers to the countries excise laws.
4.6. Trust and risk
As institutional arrangements and business outlook improves, both international and do-mestic investors have increased propensity to invest in Bulgaria’s wine network. By 2000, the
food sector as a whole accounted for some 30% of all FDI into Bulgaria, some €120 million into the wine network, the sector is additionally helped by FDI into the retail sector. The In-vest Bulgaria Agency cites as examples of FDI in the wine network, Boyar UK €50 million alongside Carlsberg, Kraft, Nestle and Interbrew). In 2005-2006, four new wineries launched their lines onto the market, including Edoargo Miroglio Winery and Bessa. There are currently 112 foreign companies from 22 countries operating within the Bulgarian wine network. Bul-garia is now one of the world’s top-15 wine producers, with 50 high quality bottling cellars, producing 173 ML a year, 65% of which is exported. It is the second largest exporter of bot-tled wine (to France) and has more vineyard hectares than California.
5. Analysis and current challenges 5.1. Purpose and goals
Like many industries in former Soviet states, Bulgarian wine’s transition has featured un-foreseen events (anti-alcohol campaign, Russian crisis, and EU accession. In the last twenty-years, industrial restructuring has touched the lives of many individuals, families, firms and communities. How clear today are the purposes and goals of the Bulgarian wine industry? To what extent is this loose network capable of migrating into a tighter cluster? Is the enologist’s boutique strategy likely to succeed? To what extent is the current mix of traditional and inno-vative firms going to remain, or alternatively will firms and a tighter networked organisational form emerge committed to innovation?
Over the last twenty-years, Bulgarian wine has responded to rather than shaped events. Given the powerful nature of some of these events (e.g. break-up of Soviet Union and EU accession), it may be that the clearest strategy for the network in 1989 would have made little difference. One of the first issues facing the wine network is the extent to which is can become a cluster. Clustering offers opportunities to deepen relationships and their value to everyone inside. There are no obvious bodies to act as a governance focus for a cluster, since many of the foreign and new companies are outside of the Association of the Producers and Merchants of Wines and Spirits and no single company is large enough to lead all of the others.
Since 2003, the boutique strategy has enabled Bulgarian vintners to re-enter premium EU markets often with high-quality local grape products. International markets for wine are in-tensely competitive, especially outside of the niché channels in supermarkets. One challenge for the boutiques is the heritage branding of Bulgarian wine in the EU as cheap and cheerful. Creating new brand recognition is expensive and time consuming. It also presumes a tighter shared purpose (cluster) than the current loose network. Separating brands, between and within networks is more difficult in an era of Internet sales, unless products are clearly differ-entiated. This may be possible but unpalatable: Bulgarian = cheap, Enira = reassuringly ex-pensive? Whilst Bulgarian Mavrud and Melnik grapes undoubtedly produce excellent wines, so too do Bulgarian Cabernet Sauvignon and Merlot; Chardonnay, Riesling and Sauvignon Blanc – a further brand differentiation, resolved in other counties by using generic naming (Rioja, Riesling).
To what extent is the current mix of traditional and innovative firms going to remain, or alternatively will firms and a tighter networked organisational form emerge committed to inno-vation?
5.2. Control, ownership and governances
Invariably before foreign direct investors make an investment they secure their supply chain, seeking vertically integrated control over services and materials that are system critical. The larger Bulgarian wine makers too have sought vertical integration, particularly by owning and planting their own vineyards, (90% of grapes remain outsourced, often from micro-businesses). Land ownership and the market for vine bearing land is a major barrier to vertical integration. The alternative of improving yield and quality in micro-business vineyards is also problematic. Insecurity of supply discomforts both potential inward investors and finance providers. This is one of many advocacy issues that a restructured Bulgarian wine network faces: to agree with Government ways of overcoming these barriers to growth.
One result of small-sized firms is their inability to provide professional service in-house (Kinder 2007a) a barrier identified in numerous EU reports (e.g. EU 2001) and Bulgaria’s in Vintellectual News (2006). In particular professional competences in marketing, finance, lo-gistics, trainers and design are critical in the growth path of small to medium sized enterprises (SMEs). For firms in less-favoured regions of Europe, this issue may be exacerbated by an absence of these professionals (drawn to cities). Elsewhere in Europe, for example Andaluciá, industrial networks have taken the lead in offering professional services and information to SMEs and instituting locally-based training for SME managers. Training in HACCP and ISO 90002 for example is an urgent need for many small wineries as is serious marketing advice. This is another example where a reconstituted wine network can contribute towards eradicating barrier to growth – in this case either by lobbying or (more likely to be successful) offering professional services from the network.
Small businesses can be the engine of growth in an economy, what Schumpeter (1939) called a large and turbulent population of innovators. As Cannon (1991) Malerba and Ors-enigo (1994) point out, family-owned and life-style business can be risk-averse and act as a barrier to innovation and productivity improvement. Unsurprisingly, SMEs have a different perspective, especially where small firms are inherent to inherited social structures and local traditions. Enriched networking is one way of avoiding taking a choice between large or small firms as the most innovative/barriers to innovation. In the case of Bulgarian viniculture, a national network enrolling large and small firms may become a vehicle to secure mutual ad-vantage: another of the insights of Margarit Todorov as BVC manager.
5.3. Hierarchy and leadership
Todorov and others, including farsighted foreign direct investors, have offered leadership at important moments to the Bulgaria wine network. Business everywhere now uses network-ing models to promote efficiency and innovation. Japanese supply, Linux, Nokia, Zara, Marks and Spencer are some obvious examples. Undoubtedly, cultural proclivities mean that social and industrial networking is a stronger part of heritage in some areas (e.g. Andalucián associa-tionism, Swedish software). It may be that Balkan culture is averse to such models of network-ing. It would be impertinent to suggest who, how and in what form the Bulgarian wine net-work might come together in a deeper way than the current loose netnet-work. Nonetheless, our analysis suggests that this is a critical strategic task facing the industry: Todorov’s example remains an illustration that rich networking can be successful in Bulgaria.
5.4. Products and functional integration
We indicated above some of the dual-branding issues associated with the export of bou-tique and economy wines in export markets. The boubou-tique strategy is also increasingly rele-vant in the domestic market, as restaurants and other premium outlets flourish. One result of the growth in boutique wine making is a shortage of vine plants (and the associated land and capital issues discussed above). One of Porter’s (1990) insights is that innovative firms need a strong home base, populated by discerning customers, in order to continually innovate products and improve quality. Nobody knows the extent of premium-priced wines inside Bulgaria such is the extent of the informal economy. It is, however, clear that the purchasers of €0.50 bottles of wine are unlikely to be the discerning customers that Porter envisaged as necessary to simu-late products for export markets.
Within living memory Bulgarians have suffered a 40% decline in living standards (1989), inflation at 122% (1994) and economic crisis (1996). Naturally, increasing prices of wine products will not be popular. Yet, without increased investment much of the country’s wine sales are in a low-quality equilibrium. These are important wider socio-political issues, beyond the scope of this paper. However, moving more of the wine network up the international value chain clearly has implications for domestic pricing.
5.6. Network ecology
The limited reach of the Bulgarian wine network is clearly evidenced in the case study, yet with EU accession and growth in Russian, Chinese and US markets, coupled to wider distribu-tion channels at home, the network could extend this reach. One qualifier condidistribu-tion will be the diffusion of HACCP and ISO 9002 standards – the implications of which include a more sys-tematic supply of life-long learning. As living standards rise, it may be that some of the wine sales in the informal migrate to formal outlets and in turn strengthen distribution channels. Rising quality standards in boutique wines (currently 10% of output) appears as the best key to open further international network connections for Bulgarian wine.
5.7. Trust and risk
A clearly established principle in social network analysis, is that in bad times networks contract and reduce in mutual trust between members, whereas in good times networks expand and increase in trust (Kuchnast and Dudwick (2004). Given some of the challenging times the Bulgarian agricultural communities have come through, it is hardly surprising that network strength and trust is diminished. Trust is the least expensive form of relationship, provided that exposed vulnerabilities remain unharmed. Trust in business networks is crucial since network resources are held in commons and whatever a networks governances, they will stop short of command and control. It may be that some of the larger wine producers are the first to display trust towards smaller wineries and vineyards by (for example) helping them secure HACCP accreditation or exchanging knowledge. Trust is a willing acceptance of exposure to risk, it is also the most efficient way of leveraging widespread support for a set of goals.
6. Conclusions
The paper illustrates the relevance of network analysis to understanding how the Bulgarian wine network has evolved over the last eighteen years. In some instances disjunctures are explicable by obvious events (Russian crisis etc). Other instances, using local grapes to suc-cessfully produce boutique wines are more complex and relate to opportunities and barriers both inside and outside of Bulgaria.
Little has been published on the strategy of the Bulgarian wine network and our aim is to show that an institutionalist approach has benefits for business and policy strategy makers.
Our essential conclusion is that shifting from a loose network towards a network capable of advocacy, service delivery and stimulating new forms of partnering, is an urgent need. In particular, if the boutique wines are to move from niché product to mainstream the barriers to volume at quality require addressing. These including land, capital, access to professionals, compliance with standards and product quality and price in the home market.
Bibliography
1. Amin A and Thrift N, 1995, Institutional issues for the European regions: from markets and plans to socioeconomics and powers of association, in Economy and Society, No. 24 (1), pg. 41–66.
2. Amin A, 1999, An Institutionalist Perspective on Regional Economic Development, in International Journal of Urban and Regional Research, June, Vol. 23, No. 2, pg. 365– 378.
3. Bainbridge S and Roe A, 1994, Bulgarian Wines, Management Decision, 32:3, 19-24. 4. Bainbridge S, 1999, The Bulgarian Vintner Company, British Food Journal, 101:5/6,
409-415.
5. Cannon T 1991, Enterprise Creation Development and Growth, Butterworth, London. 6. CEC, 2006 http://www.cee-foodindustry.com/news/printNewsBis.asp?id=70191
7. Davidova S, Tangermann S and Tosheva A, 1994, Agricultural trade: post reform chal-lenges, in Schmitz A, Moulton K, Buckwell A and Davidova S (Eds.), Privatisation of Agriculture in New Market Economies, Kluwer, Boston.
8. EU, 2001, Employment in Europe 2001 - Recent Trends and Prospects, Brussels, avail-able at http://europa.eu.int/comm/employment_social/empl&esf/docs/empleurope2001 _en.pdf
9. Euromonitor, 2007, Country Sector Briefing: wine Bulgaria, Euromonitor.
10. Häkansson H, 1989, Corporate Technological Behaviour - Co-operation and Networks, Routledge, London.
11. Invest Bulgaria Agency: http://www.investbg.government.bg/
12. Kinder T and Molina A, From Purposiveness to Sustainability in the Formation of Mul-timedia Clusters: Governance and Constituency Building in Scotland, in Braczyk H-J, Fuchs G and Wolf H-G, (Eds.), 1999, Multimedia and Regional Economic Restructur-ing, Routledge, London, pg. 269 – 297.
13. Kinder T, 2003, Supply relations in the era of the extended enterprise model: a concep-tual framework for value stream benchmarking, Research Policy, 32, 503-523.
14. Kinder T, 2007, Organisational change in agri-food networks: an analysis of agri-food networks in Andaluciá turning towards markets, Agri-food SME management in hori-zontal networks conference, Jana i Jdrzeja niadeckich, Bydgoszcz, September. 15. Kinder T, 2007a, The access of agri-food SMEs in Europe’s less-favoured region to
pro-fessional competences and its importance for company growth, Entrepreneurship and Regional Development, forthcoming.
16. Kuchnast K and Dudwick N, 2004, Better a hundred friends than a hundred rubles?, World Bank, Wasington.
17. Lamming R, 1993, Beyond Partnership - Strategies for Innovation and Lean Supply, Prentice Hall, London.
18. Malerba and Orsenigo (1994
19. Ministry of Agriculture and Food Supply, 2006, Priorities and objectives of policy in the agrarian sector and activities for their achievement, http://www.mzgar. govern-ment.bg/MZ_eng/OfficialDocuments/Agry_report/annual_report_2005.htm
20. Noev N and Swinnen JFM, 2002, The transition of the wine industry, policy and trade in Eastern Europe and the former Soviet Union, Anderson K (Ed.), 2002, Globalisation and the World’s Wine Markets, London, Edgar.
21. Noev N, 2006, The Bulgarian Wine Sector: policy issues and implications after 15 years of transition, Journal of Wine Research, 17:2, 73-93.
22. Porter M, 1985, Competitive Advantage, Macmillan, Oxford.
23. Schumpeter JA, 1939, Business Cycles: A Theoretical, Historical and Statistical Analy-sis of the Capitalist Process, McGraw-Hill, London.
24. SFB Capital Market 2006, http://sfb.bia-bg.com/index.php?lang=en&srchbranchid=11 25. Spekman RE, Kamauff JW and Myhr N, 1988, An empirical investigation into supply
chain management, in International Journal of Physical Distribution and Logistics Man-agement, Vol. 28, No. 8, pg. 630 – 650.
26. Stavrianos LS, 2000, The Balkans since 1453, New York University Press, NY.
27. Stöhr W,Regional Development strategies and the spatial division of labour, in Muegge H and Stöhr W (Eds.), 1987, International Re-structuring and the regional community, Avebury, Aldershot.
28. Storper M, 1997, The regional world: territorial development in a global economy, Guil-ford Press, NY.
29. Vintellectural News, 2006, The Living History of Bulgarian Wine Trade, available at,
2http://www.sofiaecho.com/article/the-living-history-of-bulgarian-wine-trade/id_14446/catid_75?print=1
30. Zaharieva E, Gorton M and Lingard J, 2003, Procurement mechanisms and the emer-gence of new governance structures in the CEECs: evidence from the Bulgarian wine in-dustry, Journal of Supply and Management, 9, 235-245.
USŁUGI INNOWACYJNE W SIECIACH ZORIENTOWANYCH NA EKSPORT MARKOWEGO BUŁGARSKIEGO WINA: PRZEOBRAENIA SIECI W SKALI
MAKRO
Streszczenie
Wykorzystujc narzdzia zaprojektowane dla potrzeb studium łacuchów do-staw ywnoci, artykuł przeddo-stawia analiz przypadku bułgarskiego przemysłu wi-niarskiego, na podstawie której sformułowano wnioski i zalecenia dotyczce polityki gospodarczej i rozwoju biznesu. Pozwala ledzi, jak przebiegaj procesy produkcji winoroli, wytwarzania wina i jego sprzeday w sieci kooperujcych ze sob przed-sibiorców oraz w jaki sposób sieci te ulegaj przeobraeniom z orientacji na pro-ducenta i rynki krajowe w kierunku klienta i rynku midzynarodowego.
Słowa kluczowe: sektor rolno-ywnociowy, Bułgaria, wino, sie
Tony Kinder Management School University of Edinburgh t.kinder@ed.ac.uk Milanka Slavova
University of National and World Economy, Bulgaria 1712 Sofia Mladost 3 Bl.318
