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Freemark Abbey Winery

MBA 6621

Justin Lloyd
Madeline Russell
Kofi Saahene
Moroni Williams
Yin Wong
Freemark Abbey Winery 1

Written Case Analysis – Freemark Abbey Winery

Summary

Freemark Abbey Winery is a vineyard in the northern Napa Valley. William Jaeger, a member
of the owning partnership, is facing a decision about harvesting the riesling crop ahead of an
approaching storm. The severity and temperature of the storm can be either beneficial or
detrimental to the crop. If a warm, light rain falls, there is the possibility of the mold Botrytis
cinerea forming on the exterior of the grapes. This creates a complex, sweet bouquet of flavors
that is highly valued by wine connoisseurs. However, if too much rain falls, the grapes could
swell with excess water, reducing the harvest quality.

Discussion of Decision Point and Options

The key decision point of this case is William’s decision to harvest the grapes before the
approaching storm or risk the various consequences that could appear by waiting. With the
reputation of the vineyard’s quality as one reason to harvest now, the possibility of the mold
forming can be a point of distinction for this vintage if the choice to harvest later is made. The
probability of each scenario and relative earnings can be used to help organize the decision
factors into consequences and numeric values for comparison. Below are the pros and cons for
each scenario:

Harvest Now
• Pros: There is little to consider with this choice. This is the easy money option. The
earnings are calculated at $34,200 if the harvest is performed now.
• Cons: Earnings could potentially be lower than if the mold forms or if a higher sugar
concentrations is reached in the grapes.

Harvest Later
• Storm/Mold Forms – Pros: The Botrytis cinerea adds a unique element to the wine
produced that is highly valued by connoisseurs. Bottles of wine will sell for a premium
more than double the wholesale price of the standard bottle of riesling produced by the
vineyard.
• Storm/Mold Forms – Cons: The formation of the mold on the grapes reduces the yield
of juice by 30%.
• Storm/No Mold – Pros: The harvest will not be a complete loss and the grapes can still
be harvested. The grapes would likely be sold wholesale to a different vineyard in order
to avoid damaging Freemark Abbey’s reputation by producing an inferior product.
• Storm/No Mold – Cons: The additional water from the rain will simply swell the
grapes. The result will be a thin wine that sells for an overall lower wholesale price.
While not a terrible choice, this is the only option that represents a significant loss
when compared to harvesting the grapes ahead of the storm.
• No Storm/25% Sugar – Pros: Grapes have a chance to ripen to their natural, desired
levels. Highest wholesale price other than the formation of the mold.
• No Storm/25% Sugar – Cons: Not the most desirable option if the decision is made to
gamble on the storm hitting the Napa Valley.
Freemark Abbey Winery 2

• No Storm/20% Sugar – Pros: Grapes have a chance to ripen beyond the pre-storm
harvest levels. Sugar level isn’t as high as would be preferred, but wholesale price is still
higher than pre-storm levels.
• No Storm/20% Sugar – Cons: Less desirable than higher sugar content grapes.
• No Storm/<0.7% Acidity – Pros: Not a complete loss of the harvest.
• No Storm/<0.7% Acidity – Cons: Wine production at this stage would produce a less
desirable vintage that would be sold for a loss compared to the pre-storm harvest.

Analysis and Recommendation

Several factors had made this decision difficult for William. First, unpredictable weather and the
formation of the mold are involved with uncertainty. No one can truly predict the course of the
storm, amount of rainfall produced, or if the botrytis mold will form on the grapes. Second, the
available information provides little to no information of the winery’s objectives. We assume the
objectives include generating higher revenue while maintaining their reputation for a high
quality product. Finally, there is only assumed information regarding total revenue the winery
generates each year or how much risk the winery is willing to assume with each crop. Therefore,
we compare all the scenarios to the baseline standard: the no-risk option. By harvesting the
grapes before the storm, the vineyard would see earnings of $34,200. All other alternatives
should be compared to this value.

William’s decision can be analyzed in terms of uncertainty or in terms of risks. As stated in


Chapter 7 of Smart Choices, William can use a decision tree (p. 119) to simplify the decision
(Exhibit 1) (Hammond, Keeney, & Raiffa, 1999). A decision tree lays out the alternatives,
possible outcomes of uncertainty along with the chances of them occurring, and the associated
consequences. There is an equal chance of the storm hitting the valley or tracking elsewhere.
Looking at the potential options of the storm hitting the valley first, William estimates there is
about a 40% chance the rain could produce the desired mold on the grapes (20% overall
probability). The winery would see bottles of wine sell for $8.00 per bottle at wholesale prices.
Due to the effects of the mold formation, a decrease of 30% in juice yield, the earnings would be
$67,200 with this option. All other alternatives, possible outcomes of uncertainty, chances of
uncertainties occurring, and the consequence are shown on the decision tree (Exhibit 1).

William has a 60% chance of exceeding the baseline earnings by assuming the risk of the
unpredictable weather and mold formation. Because Freemark Abbey Winery is known for
producing a premium wine, reputation is extremely important for the winery and it is in the best
interest of the vineyard to do all it can to maintain quality or produce a product that differentiates
itself from other available options. From a risk perspective, William can create a risk profile (p.
136) with a desirability score to quantify each consequence as suggested in Chapter 8 of
Smart Choices (refer to Exhibit 2) (Hammond, Keeney, & Raiffa, 1999). The desirability
scores that were assigned to each outcome are based on the quantitative factors (expected
earnings) and qualitative factors (winery’s reputation).

There are some influencing factors that are not mentioned in the available information William
might consider in making his final decision. Two examples are: how much ownership does
William share in the winery, and will the storm affect the grapes that are used for other types of
Freemark Abbey Winery 3

wine and the winery’s overall financial position. Additional questions may need to be answered
as well to address if there is a need to harvest the vineyard’s other grape varieties ahead of the
approaching storm that are used for other types of wine. If the storm will reduce quality in other
wine varieties, the potential losses could be much more significant. If Freemark Abbey Winery’s
annual earnings are higher than the approximated $1 million, the potential losses associated with
the riesling decision may not impact the overall bottom line by more than 2-4%. That may lower
the associated risk factor of the decision to a much more acceptable level. Evaluating all the
available information, it appears that one of the primary decision factors of the winery is to
maintain their level of quality in the wine produced. The winery maintains an option to not
produce any vintage that would reflect poorly on its quality standard. If they are willing to forfeit
those earnings in exchange for a perception of higher brand quality, there must be an acceptable
level of risk for not reaching their quality indicators. The winery places heavy emphasis on
distinction and quality. William should wait out the storm, as that decision provides the highest
chance of meeting those goals.
Freemark Abbey Winery 4

Exhibit 1

Harvest 0% Risk
$34,200 Botrytis 40% Overall Probability 20% $67,200

Freemark Storm 50% Bottle Overall Probability 0% $24,000

Abbey
Winery
Case
Analysis No Botrytis 60%

Don't Harvest Don't Bottle Overall Probability 30% $12,000

No Storm 50%

25% Sugar 40% Overall Probability 20% $42,000


20% Sugar 40% Overall Probability 20% $36,000

Acid level < 0.7 20% Overall Probability 10% $30,000


Freemark Abbey Winery 5

Exhibit 2

Freemark Abbey Winery Risk Profile with Desirability Score


Contribution to Overall
Outcome Chance Desirability score Desirability Expected Profit Expected Value
Harvest prior to storm 0% 50 0 $34,200 $0
Alternative Overall desirability score: 0
Storm Hits
Botrytis forms 20% 100 20 $67,200 $13,440
No Botrytis forms
Bottle 0% 35 0 $24,000 $0
Don't Bottle 30% 0 0 $12,000 $3,600
No Storm
25% Sugar 20% 90 18 $42,000 $8,400
20% Sugar 20% 60 12 $36,000 $7,200
Acid Level < 0.7 10% 50 5 $30,000 $3,000
100%
Alternative Overall desirability score: 55
Freemark Abbey Winery 6

References
Hammond, J. S., Keeney, R. L., & Raiffa, H. (1999). Smart Choices. New York: Broadway
Books.
Krasker, W. S. (1980, 08 01). Freemark Abbey Winery. Retrieved 09 17, 2015, from Harvard
Business Publishing: https://cb.hbsp.harvard.edu/cbmp/product/181027-PDF-ENG