Gallo did not just help put California’s wine industry on the map; he helped establish the modern U.S. wine market as a whole once prohibition came to an end. Aside from the personality characteristics and work ethic that helped Gallo succeed as an entrepreneur, it was largely his strategic decisions on how to gain industry dominance in all aspects of his operations that transformed E&J Gallo Winery from a two-man operation into an international success story.
From the very beginning, Gallo made sure that the power given to his suppliers was low. He outsourced his harvesting operations to small, independent, and fragmented growers in order to get market prices. He also ensured that by keeping control of distribution channels, he prevented them from integrating and moving forward on their own.
Gallo also made it a top priority to heavily finance research and development in order to stay on top of modern mechanisms and know the growing operations better than his suppliers. He was always looking for new ways to cut costs and increase volume and quality. Gallo knew that knowledge was something that is hard to imitate, and the more he had, the more he gained ground over his competitors.
Gallo did what he could to keep industry rivalry low. He developed coalitions with other major distributors that worked to prevent any new entrants. He responded aggressively to those who did try to enter the field, especially by scaling up his operations, taking advantage of scale economies, and under-pricing his competitors. After all, he could afford to do it while they could not.
In addition to keeping the power of both his suppliers and competitors to a minimum, Gallo kept the power of distributors low by taking control of a number of distribution outlets. The depth and extent of his distribution channels would be hard for any competitor to imitate. He also began the trend of advertising directly to customers in order to create a sense of brand loyalty.
By gaining at least moderate control over different segments of the industry, Gallo was ensuring his strong position as an industry leader. Gallo was consistently three to five times the size of his nearest competitor, since few could match his scale or expertise. Likewise, his advertising budget was between four to eight times larger than theirs. He generated strong brand recognition among customers, while also dominating store shelf space thanks to exclusive distribution agreements.
Even while he was still in the startup stages with few of the advantages of economies of scale, Gallo remained consistently aware of the need to position himself so that he would one day be able to leverage himself over the other players of the game.
Gallo focused on managing not only his own company, but on the structure of the wine industry as a whole. As such, he was able to enhance his own market position and control the entry of others, thereby becoming an industry leader.
Lesson #5: Position Your Business to Become an Industry Leader
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