Porter?s THEORIES WITHIN THE AUSTRALIAN COFFEE shop industry 1 Executive Summary ??????????????????? 1 2 Porter?s Five Forces Model???????????????? 2 2.1 Threat of new entrants????????.. 3 2.2 Bargaining Power of Suppliers ????.. 3 2.3 Bargaining Power of Buyers ?????? 3 2.4 Intensity of Rivalry ??????????. 4 2.5 Threat of Substitutes ?????????. 4 3 Porter?s Value Chain ??????????????????? 5 3.1 Inbound Logistic and Procurement ??.. 6 3.2 Operations and Technology ??????. 6 3.3 Marketing/Sales and HRM ??????? 6 4 Porter?s Three Generic Strategies ????????????. 7 5 Recommendations ???????????????????.. 8 5.1 Low entry barriers ???????????? 8 5.1.1 Building a Strong Brand Name ?.. 8 5.1.2 Provide service the public expect.. 9 5.1.3 Build relationship with supplier.?. 9 5.2 Bargaining Power of Buyers ?????? 9 5.2.1 Make switching costs higher??? 9 5.3 Lack of industry experience ?????? 10 6 Bibliography ???????????????????? 11 Fig 2.1 Analyses of coffee industry using Porter?s Five Forces Model ??. 2 Fig 3.1 Porter?s Value Chain ??????????????.???????? 5 Fig 4.1 Porter?s Generic Strategies Model ???????????????.. 7 The purpose of this report is to investigate and evaluate the coffee shop Industry and one of it key competitors, Gosh, a subsidiary of Brazin Ltd.
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Porter’s five forces model helps in accessing where the power lies in a business situation. Porter’s Model is actually a business strategy tool that helps in analyzing the attractiveness in an industry structure. It let you access current strength of your competitive position and the strength of the position that you are planning to attain. Porters Model is considered an important part of planning ...
The evaluation of the industry is based on Michael Porter?s Five Forces Model, which suggests that from the perspective of existing members of the industry, the market is unattractive. Porter?s other contributions, the value chain and his three generic strategies were used in an analysis of the individual company, Gosh. From these investigations, recommendations have been made on how Gosh can improve its overall profitability, such as developing their brand name and overall customer loyalty. It must be realised this reports suffered from the limitations of a word count and lack of information about Gosh. With this in mind further investigations need to be made before any of the recommendations are considered for implementation. This model devised by Michael Porter ?proposes that business-level strategies are the result of five competitive forces in the company?s environment? (Porter, 1980).
These forces as seen in the diagram below include; potential new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products and rivalry among competitors. In order for the model to achieve its designated purpose of evaluating the attractiveness or unattractiveness of entering into such business, one must first define the industry he or she wishes to analyse. Without a clear definition, an attempt to evaluate the forces is futile, as inaccurate hypotheses will be concluded. In this scenario, the industry is defined as the coffee shop market. The aforementioned attractiveness or unattractiveness depends on whether the forces are being evaluated from the perspective of a new entrant or from an existing player. This report examines the industry from an existing players perspective. The threat of new entrants is based on the extent to which new competitors can enter the market. In reference to the coffee shop industry, it is a fairly easy market to penetrate. It requires relatively little capital investment (particularly with equipment often being provided by the suppliers for free), there are no government regulations and no switching costs for company?s customers.
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The fact that anybody could open a coffee shop makes it particularly unattractive for those who already exist in this industry. There are a number of suppliers that provide products to coffee shops like Gosh. These include the suppliers of the coffee beans, milk, sugar, equipment and store furnishings. It is well recognised that within Australia, the supply of coffee beans is a cut-throat market where one supplier can be easily substituted for another because coffee beans are not unique. For example substituting Coffex for Vittoria. Furthermore, no supplier has apparent control of the market. Therefore, ??if a firm is purchasing supplies from suppliers who [do not] control a large share of [their] market, the suppliers will [not] be able to control prices? (McColl-Kennedy, Kiel, Lusch, Lusch, 1994), resulting in little bargaining power. Suppliers of other goods, with fewer suppliers, for example sugar, may have a higher bargaining power over the coffee shops. Overall, this is an attractive feature of the industry from the players perspective. Within the coffee shop industry there is only one type of buyer, the individual. However, the coffee shop industry must realise that it is extremely hard to differentiate their product. Therefore, in situations where products ??are incapable of being differentiated, the bargaining power of buyers is strengthened.? (Bradmore, 1996).
Additionally, the high availability of substitutes (sec 2.5) also adds to buyers bargaining power. The higher the buyers power, the more unattractive the market for the industry competitors. Although ??Australia has about 6000 cafes?[according to Patria Jafferies, Dome?s managing director]?there is room in this market for everyone.? (Treadgold, 2000a).
This feeling appears to be mutual throughout the larger competitors, with Brett Blundy, the managing director of Brazin Ltd. (owners of Gosh) agreeing ??there is room in the market for a lot of companies.? (Lloyd, 2000).
This relaxed attitude is an advantage to those who are already in the industry. A substitute is something that the consumer will be satisfied with purchasing or using, instead of the product in discussion, in this case, coffee. It is obvious that coffee has a number of substitutes such as tea, soft drinks and milkshakes to name but a few. The switching costs involved for the consumer are low and therefore, the threat of substitutes is said to be high. This is another unattractive force for the coffee shop industry. Using this method to determine industry attractiveness for existing competitors, the coffee shop industry can be considered fairly unattractive. Looking at the above diagram, there are only two ticks which represent attractive features of the industry, whilst there are three crosses which indicate unattractive forces. Porter (1985) believes that ??competitive advantage cannot be understood by looking at the firm as a whole??. Therefore, he developed a value chain which provides a method for a company to compose a graphical representation of where their costs and values arise. It allows the company to disaggregate and subsequently scrutinise all their activities. Across the bottom level of the chain are the primary activities in which the company participates in order to hopefully achieve a profit.
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The top half of the above diagram shows the support activities that, as the name suggests, provide assistance to make the primary activities possible. The question that each company must ask itself, once it has decided on one of Porter?s Generic Strategies (see sec 4) is, how will it lower costs or differentiate itself. As seen in the following section, Gosh, have adopted a differentiation strategy. For each company, the primary and support activities are greatly intertwined. Gosh, is no exception. There are countless links between each of their activities, which is to be expected in any firm which is running effectively, however, this makes discussing them more difficult. Therefore, only a few different links have been discussed. 3. 1 Inbound Logistics and Procurement Procurement according to Bradmore (1996) are ?the activities involved in?the purchasing of a wide variety of inputs.? This is clarified further by Porter (1985) who suggests that it is ??the function of purchasing inputs?not the purchased inputs themselves.? This obviously ties in very closely with inbound logistics which revolves around getting the raw materials required for production into the company. With Gosh as an example, the purchasing procedures used to reorder low levels of coffee beans and organise for their delivery would keep costs low and help ensure adequate levels of stock at all times, which adds value to the company.
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Operations, also known as operations and production, is the actual transformation from raw materials to finished product. Obviously the companies infrastructure will play a part in the way in which the procedures are accounted for, however infrastructure is said to be an essential part of every action. The support activity, technology, is also of vital importance at this stage. In order for Gosh to set prices, management will have allocated a certain amount of the cost to raw materials. Technology such as, coffee regulators, which dispense a predetermined amount of coffee ensure that budgeted amounts are maintained, wastage is low and value per cup is high. 3.3 Marketing/Sales and Human Resource Management In order for Gosh to become a ?household name?, effective advertising and enticing promotions are essential. However, for these to be considered a possibility, those in the Human Resource department must fulfil their roles. With the right staff, unlimited value to the company is attainable, however, if the department recruit the wrong people for the job, costs will soar and market share will be lost, possibly forever. Porter suggests that in order for a firm to achieve a sustainable competitive advantage, they can follow one of three generic strategies.
As seen in the diagram below, the strategies include; cost leadership, differentiation, cost focus and differentiation focus. The difference between the two levels is, ??the focus strategy aims at a particular market segment, where as the overall cost leadership and differentiation strategies are directed industrywide.? (Kreitner, 1989) Fig 4.1 Porter?s Generic Strategies Model To establish which strategy is being used it must firstly be established whether Gosh is targeting a broad or narrow market. According to Simon Lloyd?s article ?Big Beans?, Gosh expects to have 300 store in a range of differing locations, operational within four years. Clearly, they are trying to target the entire industry. Furthermore, the article explains that Gosh hopes to ??revolutionise coffee retailing in Australia?? and they further believe they will be able to offer something that the others, particularly Starbucks, cannot. Whilst they recognise that they ??both rent shops and sell coffee??(Treadgold, 2000) Gosh believe the factor that will distinguish them, is they will be able to Australianise the concept. This approach is in line with the differentiation strategy which ??involves an attempt to distinguish [oneself] from others in the industry?? (Daft, 2000) as opposed to the cost leadership strategy, whereby the company tries to win business through being the cheapest in the industry. Firms must remember that ?strategies that change industry structure can be a double-edged sword, because a firm can destroy?profitability as readily as it can improve it.? (Porter, 1985).
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With this in mind, the following are recommendations based on minimal research and therefore should be considered further before any implementation is considered. As seen in section 2, the threat of new entrants to this market is considerably high because of the relatively low set-up costs involved. Therefore, Gosh needs to make the coffee shop industry a harder market to access. One way to achieve this is by building brand loyalty. According to Bradmore (1996) ??Strong brands add value to the firm?Strong brands add value to customers.? There are a number of ways to build Gosh?s brand name and eventually increase brand loyalty. As a relatively unheard of player in the market, Gosh needs to promote their name. They have a unique opportunity to use their Australian image to edge out competitors like Starbucks. Advertising, sponsorship and free tastings are just some of the options available to Gosh in order to capture the public?s attention. Once it has caught their eye, they needs to ensure that they are able to retain customers. An easy way to entice customers into becoming regulars at their local Gosh store is to provide an incentive to buy their product. The incentive could be personal, such a VIP Coffee Card, which entitles the drinker to redeem his or her points for free coffees.
Or, the incentive may be community based, whereby a donation is made to a charity in the area, like Riches Supermarkets is currently operating. It is obvious however, that customers will not return, not matter what incentives are offered, if they do not like the product and the service. 5.1.2 Provide the service the public expect Since Gosh has accepted that they will not be cost leaders in the industry, their customers will expect a certain level of quality and service to be maintained throughout all their stores. To achieve this level of service, strict recruiting policies should be developed and adhered to, to ensure that the staff can competently make coffees and provide good customer service. Furthermore, the customer will expect the same high quality of coffee in every Gosh store they enter. To achieve this a strong relationship with a supplier is necessary. 5.1.3 Build a relationship with a supplier A strong relationship with their supplier will ensure that they will always have a sufficient level of high quality stock. As mentioned earlier the supply of coffee beans is a highly competitive industry and no supplier is likely to jeopardise a lucrative, long-term contract by providing lower quality beans.
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In order for switching costs to appear higher to the customer they will need to desire Gosh?s product over any other. The switching costs are likely to increase with an increased loyalty to the product. Again, incentives such as a VIP program would help make the cost of switching coffee shops higher. Additionally, it has been established that the availability of substitutes is high and therefore a concern to Gosh. However, loyalty to their product will increase switching costs in this force, which will leave a coffee at Gosh looking more attractive than a milkshake from a competitor. 5.3 Lack of experience in the industry 5.3.1 Seek the advice of professionals in this area It may also be of long-term value to speak to consultants in the industry as Brazin seem to be relatively inexperienced in the coffee industry. All4Cofee offer consulting and management services based on the coffee industry. Their website contains some useful information and it may prove worthwhile to actually appoint a consultant. Their website address is http://www.all4coffee.com/all4coffee/1consulting.htm. In an article by Tim Treadgold (2000b) he mentions that Starbucks believes they will not be taking market share from local competitors, but suggests that there is potential to build the total category. It may therefore prove beneficial to make short-term strategic alliances that will assist such an plan.
Bibliography:
Bibliography Bradmore, D., (1996), Competitive Advantage: Concepts and Cases, Prentice Hall: Sydney. Daft, R.L., (2000), Management, 5th Ed, Dryden Press: Sydney. Kreitner, R., (1989), Management, Houghton Mifflin: USA Lloyd, S., (2000), ?Big Beans?, Business Review Weekly, vol.22, no.34. McColl-Kennedy, J.R., Kiel, G.F., Lusch, R.F. and Lusch, V.N., (1994), Marketing: Concepts and Strategies, 2nd Ed, Thomas Nelson: Australia. Porter, M.E., (1980), Competitive Strategy: Techniques for Analysing Industries and Competitors, New York: Free Press. Porter, M.E., (1985), Competitive Advantage: Creating and Sustaining Superior Performance, New York: Free Press. Treadgold, T., (2000a), ?Rivals brew up a battle of the bean?, Business Review Weekly, vol.22, no.15. Treadgold, T., (2000b), ?Coffee chain blends home style with awareness?, Business Review Weekly, vol.22, no.17.
