Analysis of Costa’s Activity
Business Activity
Costa Coffee is the UK’s favorite coffee shop and one of the world’s leading coffee brands, serving premium coffee in .. countries around the globe (Costa official website, n.d.). The company uses Arabica and Robusta beans, originating from 70 countries situated at the Bean Belt region, in the equator, going through a rigid process of cropping and roasting, to assure the top quality coffee served in Costa’s shops (Costa official website, n.d.).
Therefore, the scope of Costa’s activities refers to selling premium coffee through dedicated stores. It also includes selling coffee through vending machines, situated in petrol stations, hospitals and universities, under its “Proud to Serve” franchise stores committed to serve quality coffee everywhere (Mark & Birkinshaw 1; Whitbread 30). However, the scope of Costa’s business stretches beyond the activity of selling coffee, including other operations, such as buying, roasting and preparing quality coffee, which imply interlinked operations and supplier chain management.
The resource based view identifies the value (V), rarity (R), inimitability (I) and organizational support (O) that internal resources and capabilities within a firm possess, defining the VRIO framework (Peng 71).
Johnson, Scholes and Whittington (94) indicate that a firm’s capabilities are of three kinds, respectively heterogeneous, which are industry – specific, strategic capabilities, which refer to difficult to imitate resources and distinctive capabilities. The authors also say that the source of competitive advantage stays in the distinctiveness of their capabilities (Johnson et al. 94). Looking at Costa’s capabilities, the heterogeneous capabilities, or the industry – specific features refer to supplier network and distribution, technology of producing the coffee, human resource management and organizational culture or involvement in corporate social responsibility causes (Geereddy 10). These features are industry – specific because all companies activating in the coffee industry possess them, although not in an identical manner, having different structures and approaches for them (Johnson et al. 94).
The strategic capabilities within Costa include its technology processes. They imply careful cropping (picking them from the coffee cherries and sorting them by size in “breathable sacks” to be shipped) and roasting (testing the quality of each batch of coffee and roasting the coffee beans at temperatures between 200 and 240 degrees Celsius) (Costa official website). Therefore, its technology also assures Costa the superior quality of its product, which is difficult to copy, and a strong brand image and reputation.
In terms of distinctive capabilities, Costa’s source of competitive advantage, which confer the company superior performance (Johnson et al 94), refer to its vending machine system, its brand image and its market penetration, especially in UK market, owning over 2000 stores in UK, followed by Starbucks with less than 900 stores (Lynch para 4). Diversification is yet another distinctive capability, as besides its classical stores where it sells a wide range of coffee products, ice, cakes, muffins, biscuits, etc., and the vending machines, Costa also includes Costa Fresco, where it sells fresh food like salads or healthy snacks (Anderson para 2; Costa official website).
VRIO framework
Therefore, Costa drives its sustainable competitive advantage from its brand image/reputation, its diversification and the significant market penetration in the domestic market, United Kingdom. It also benefits of temporary competitive advantages, which are is organizational culture, quality of its products, technology and the vending system, whose sole disadvantage is that they are imitable, and can determine Costa’s competitors to copy its models, transforming these strategic or distinctive assets into industry – specific capabilities.
Competitive, Macroeconomic and Broader Business Environment
Porter Five Forces
The competitive factors that define the coffee industry are analyzed with Porter Five Forces model, respectively the bargaining power of customers, the bargaining power of suppliers, the threat of newcomers, the treat of substitute power and the existent rivalry (Johnson et al. 60).
The bargaining power of customers
For the coffee industry, there is an increasing market of customers in developed and developing nations that assure high consumption of different types of coffee. For instance, whereas in United States customers prefer coffee to go and pay extra for premium coffee, in Europe and China, clients have also developed a taste for premium coffee, but they demand a different experience, as they prefer sitting, considering coffee drinking as an opportunity to interact and socialize (Bolt para 4). However, considering that there are lots of coffee consumers, but very dispersed, it is difficult for them to pressure coffee companies in terms of price, even more so considering that there are several brands that serve premium coffee, in a rather monopolistic industry (Geereddy 3).
These conditions impose market adaptation requirements for Costa. The vending machines, available through the Costa Express service adjust to the coffee to go demand. However, in markets dominated by its main rival, Starbucks, the vending system often fails to be associated with premium coffee, allowing Starbucks to take over customers (Manifest Marketing para 5).
The bargaining power of suppliers
There are several premium coffee suppliers of Arabica and Robusta beans, which allow switching costs between them, as they compete among themselves for selling their coffee beans making this force moderately low (Geereddy 3). However, the legislations imposed on treating the suppliers ethically raise the bargaining power of this competitive force to moderate, as companies provide better work conditions and higher payment for their suppliers (Costa official website).
The threat of new entrants
The coffee industry imposes high barriers of entry through the existent industry regulation, but also through the high reputation and brand recognition of the companies already activating in this system (Diaz 59). The real threat of entrants in the coffee industry comes from organizations that activate in related industries and choose to diversity in the coffee market. This has been the case of McDonald’s, a fast food company, now also highly popular for its coffee products, or Tesco, which target the price – sensitive, mainstream market (Geereddy 2; Mark & Birkinshaw 7). Therefore, under these circumstances, this force is moderately high, with the major threat coming from the already established companies that decide to enter into the coffee market. For Costa, competitors like McDonald’s and other similar fast food company that enter the coffee market provide a parity competitive dynamic, as Costa balances their entrance on the coffee market with its own entrance in the food segment, through Costa Fresh, looking to gain over the health conscious customers. Costa Express is a premium alternative for the more affordable coffee served at Tesco or similar stores, but in this case these entrants to not represent an actual threat for Costa, because they target different customer segments.
The threat of substitute products
Consumers’ preference for home – made coffee has decreased recently, as they started to appreciate more the out of home coffee drinking, emerging towards a modern life style (Ford 3). However, other products, such as tea, fruit juice or water have also become increasingly more appreciated by customers, especially the sugar free, non – carbonized drinks, constituting a high substitute threat for coffee, even more so considering the fact that there are no switching costs for buyers (Geereddy 3). These aspects make the threat of substitute products moderate to high.
Existent Rivalry
The rivalry within coffee industry is high, with a monopolistic competition having Starbucks as the global leader, followed by Costa and other competitors that pressure each other in the markets that they share. The lack of switching costs for customers increases the rivalry within this industry, as they can easily opt to purchase their coffee from a different coffee maker (Geereddy 3). This implies that the rival companies adapt and influence each other’s strategies by creating different marketing mixes, in order to pursue different competitive strategies.
Costa, Starbucks and more recently McDonald’s promote their stores as comfortable places suited for business meeting, working or relaxation, spending time with friends.
PESTLE Analysis
The political environment imposes particular codes of conduct on companies activating in the coffee industry, by regulating their relationship with suppliers for an ethical treatment for trade partners from developing nations (Costa official website; Diaz 62). Political relationships with foreign countries can also impact the coffee firms’ performances, increasing the rigor of the legal conditions or being boycotted by rebels that oppose specific cultures (Diaz 44).
For Costa, the policies on ethical treatment of the suppliers have become integrated actions of its organizational culture and corporate social responsibility programs, contributing to strengthening its brand image and reputation.
Economic factors that impact the coffee industry include consumers’ spending power and confidence, which has a direct effect on companies. This was the case in the recent economic crisis, when, starting 2009, this industry registered a major slowdown because consumers changed their preference from eating and drinking outside into low-priced in-home consumption, as a result of shrinking budgets (Geereddy 2). However, since 2010 the economy stabilized and the out of home coffee consumption increased, highlighting a preference for the quality coffee (Euromonitor “Coffee in the United Kingdom” 1). Other economic factors that impact the coffee industry are the currency exchange and the interest rate, which can result in fluctuations that can negatively affect players in this industry (Whitbread 96). A major economic factor, especially for the UK domestic coffee companies, is the Brexit, UK’s vote to leave European Union, which might impact the foreign relationship with trader partners, both in terms of upstream and downstream supply, although the outcomes are still unclear (The Guardian para 1). Increased taxes might be imposed for importing the coffee and the prior free market relationship with EU countries might also be eligible to taxes (The Guardian para 12).
For Costa, the foreign currency translation into sterling pounds can result in either gains or losses, while the interest rate also represents a risk factor for its performance (Whitbread 122). Negative performances will be generated by Brexit, as Costa will have to pay in order to continue its international presence in EU markets.
The social factors suggest consumers’ tendency towards adopting a healthy lifestyle, visible through their preferences for quality products, rich in caffeine and with low sugar and milk make them feel and look good (Euromonitor “RTD Coffee in the United Kingdom” 2). Culture, on the other hand, can have tremendous influence on coffee consumption around the world, as different nations prefer different types of coffee, specific to their countries, or prefer tea to coffee (Diaz 63).
These socio – cultural factors put a pressure on Costa to adjust to different conditions, lifestyle and preferences.
The technological factors can impact the coffee market by advancing new and effective models of coffee roasting and processing, or by allowing the alignment of consumer preferences with store offerings, by integrating social media and review platforms into the daily business practice (Diaz 63; Geereddy 6).
Costa’s roasting technology is standardized and rigid, imposing strict quality standards, but an increased attention on customers’ preferences would advantage Costa to adjust to different markets.
Legal factors affecting the coffee industry are related to employment regulations, health and safety standards for employees and clients, but also to import and export legislations that are specific to each country (Diaz 9).
Costa’s international presence implies accommodation to different legal systems and political regimes that either facilitate or hamper the foreign trade. Raises in the minimum wage impose pressures on the company to increase the cost of employees, which minimizes its overall performances.
Environmental factors such as water, energy or waste affect companies in every industry, due to the pressures legally imposed to adopt environmental – friendly actions (Johnson et al. 55). Specifically, coffee industry is dependent on sun and rain and directly influenced by draughts or poor harvest, which can negatively impact not only the quantity, but also the quality of the coffee beans (Diaz 22).
The environmental legislation determined Costa to adopt an environmental sustainable approach, sourcing coffee from farms certified by Rainforest Alliance, which use sustainable practices (Costa official website). However, it cannot influence the weather conditions or other climatic changes that are the result of human impact on the environment, such as the global warming.
Competitive Strategy
This analysis requires the application of Porter’s Generic Strategy framework, which represents approaches that organizations can pursue for achieving competitive advantage, such as: overall cost leadership, generic differentiation and focused cost leadership or focused differentiation (Johnson et al. 224). Costa’s products range in the high price category, considering that the coffee is premium and that it employs special processes and collaboration agreements with suppliers in order to ensure quality, hence differentiation. Considering that Costa products are targeting a large market of consumers, its competitive strategy is generic differentiation.
Evaluation of the Competitive Strategy
Suitability, acceptability and feasibility (SAF) matrix will be used to evaluate Costa’s general differentiation strategy (Johnson et al. 365-366). The generic differentiation is the same strategy that Starbucks pursues. But considering the long tradition of Costa Coffee (over 40 years of expertize), this strategy is suitable for Costa, because it requires a reputable brand with extensive market knowledge to challenge the market leader, addressing the market’s opportunity of presenting an alternative for Starbucks (Costa official website).
However, from a feasibility perspective, the strategy works in practice, as there is the financial potential to sustain generic differentiation across the markets in which Costa is present. In addition, it employs trained and skilled people that can sustain the general differentiation (Whitbread 24; Johnson et al. 380).
According to SAF analysis, Costa’s competitive strategy, the generic differentiation, is effective for the company, taking into consideration its industry rivalry and the external environment in which it competes.
Works Cited
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