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1.0 Introduction

Costa Coffee is a multinational coffeehouse headquartered in Dunstable, United Kingdom (Mortimer, 2011). Costa Coffee is the largest coffeehouse chain in the United Kingdom, and it is the second-largest in the world behind Starbucks. It was founded in London in 1971 as a wholesale supply roasted coffee to specialist Italian coffee shops and caterers. The company has over 3500 express vending facilities. It also has over 1,755 UK restaurants and 1,106 outlets overseas. Competition in the brewing industry among the UK coffee chain is intense. The main competitors of Costa include Café Coffee Day, Mochas, Barista, and the local cafes. In the last three months, Costa sales rose by 7.1% against its closest rival Starbucks because of the US chain’s controversial tax arrangements. Costa provides its market with a wide range of products which include tea, fresh juice, ice creams, sodas, and food. Costa is known for charging premium prices for its products. In 2009, Costa Coffee acquired Coffee Heaven for £36 million, adding 79 stores in eastern and central Europe. By the end of 2010, Costa Coffee had reached a 46.5% market share(Mortimer, 2011).

The report does the organizational strategy and decision-making of Costa Coffee. The report has three main sections. The first part of the report analyses both the internal and external analysis using SWOT analysis. The second part of the report analyses the external environmental factors using the PESTEL framework. The last part of the report does Porter’s three generic strategies.

2.0 Internal Environment analysis

2.1 Strengths

Costa Coffee has a strong brand that is associated with excellent customer service and quality coffee (Whttington, 2000). Costa’s strong brand defines the company, distinguishes it from its competitors, and appeals to its targeted audience. A strong brand develops a positive image of the products of the company in the minds of the customers, attributing goods with certain characteristics. Through a strong brand Costa is able to command premium prices for its products. Costa provides its customers with premium music, perfectly blended coffee, a warm atmosphere, and friendly staff and hence the provision of incomparable customer service. Lastly, the company provides its customers with a range of products, it offers tea, fresh juice, de-caf drinks, ice creams, sodas, and food and the strategy has helped the company to gain a large market share(Whttington, 2000).

2.2 Weaknesses

Costa Coffee has negative publicity over its poor efforts to be a greener corporate(Lynch, 2006). Negative publicity portrays a company as dishonest, irresponsible, or appearing to be only looking out for its best interests. Negative publicity could damage the good reputation of the company and it negatively affects the financial results of the company. Negative publicity also affects the ability of the company to keep and attract consumers. The price of coffee beans also has an influence on the company’s profits. The company’s profitability and its price of coffee are dependent on the prices of coffee beans. Due to extreme weather conditions and hedge funds, Costa Coffee cannot control the price of its coffee and the profitability of the company(Kolk,2012).

3.0 External environmental analysis

3.1 PESTEL

PESTEL is an acronym of for political, economic, social, technological, environmental and legal factors. These external factors have great impacts on the performance of Costa Coffee (Johnson, Scholes and Wittington, 2010). The figure below shows a detailed PESTEL framework.

Figure 2: Generic PESTEL framework

Source: Lynch, (2006)

3.1.1 Political factors

The change of the political climate in 2010 in UK due to the coalition government resulted in several changes in the government’s policies. It mainly affected the taxation policy of UK. Since then the government’s taxation policy has been increasing day by day and it has affected the buying power of the Costa’s consumers (Glaister & Hughes, 2008). According to the World Bank (2014), the rate of taxation in UK is 20%. The stable political environment in the UK has positive impacts on the operations of the Costa Coffee. Stable political environment in the region allows the business to carry out its operations effectively without interference.

3.1.2 Economic factors

The rates of exchange and inflation reduce the buying power of people. In the last two years the Value Added Tax (VAT) has increased in UK from 17.5% to 20%. This has resulted to increase in the price of the Costa products (World Bank, 2014).According to BBC News (2014), the inflation rate in UK has risen from 1.2% to 1.3%. Inflation rates results in low sales performance and the buyers may not be able to afford the cost of buying a cup of coffee(Carlsen, 2000). Inflations may make the customers set priorities of their buying, by placing essential needs first when buying.

3.1.3 Socio-cultural factors

In UK, there is a great concern regarding health issue. According to Cano-Marquina, Tarín, and Can (2013), coffee has serious negative impacts on health and because of this, most people are looking for new drinks such as de-caf beverages, tea and fresh juices. This has made the company lose its market share.

High living standards and high education among the people in the UK increases the demand for high-quality products from Costa Coffee(Johnson, Scholes and Wittington, 2010). 45 % of 25-34 years old in the United Kingdom have attained higher education than their parents (Universities UK, 2011). According to the World Bank (2014), the UK’s populous group is the economically- active population that is aged between 16 and 64. United Kingdom has an even distribution of age whereby the working population forms the biggest group of the total population. Most people in the working population have good health and therefore, they cannot develop complications whenever they take coffee.According to Aeschbacher (1988), it is not recommended for the old and those who have suffered from heart attack to take coffee.

3.1.4 Technological factors

Most customers in UK are tending towards online buying, and this is accelerated by the use of technological facilities such as fibre optics and 3G networks (Liang and Lim, 2011). In the UK, the access to the internet is increasing day by day. Studies show that 30 million households have access to the Internet. This ratio increases the trend of online marketing and buying, which is helpful for the Costa Coffee in the sense that it can start its online marketing campaign. According to Liang and Lim, 2011, about 99% of people in UK spend their time using the internet and watching TV on evenings and weekends.

The use of video conferencing among the top management of the company provides cheaper, faster and more reliable means of communication in the company (Agius and Angelides, 1997). With the use of the technology, Costa Coffee has been able to attain competitive advantage in efficiency, profitability and productivity in the brewing industry.

3.1.5 Environmental factors

With the spread of the environmental awareness among people in the UK, Costa Coffee focuses on the environmental impacts(Fletcher, Potts, Heeps and Pike, 2009). Currently, Costa Coffee is focusing on long-term environmental strategy. Organisations such as Friends of the Earth, Intergovernmental Panel on Climate Change (IPCC) and Ethical Consumers watches the environmental activities of the company to the members of the public (Owens, 2010).

3.1.6 Legal factors

Costa’s operations are affected by laws such as the Consumer Credit Act Sales of Goods Act, Supply of Goods and Services Act(Johnson, Scholes and Wittington, 2010). These laws protect the consumers against exploitation and unfair treatment. Costa always operates in line with these laws and hence it works towards improving safety and health of the consumers and the employees. Copyright protection laws and intellectual laws protect the company against unfair competition(Lynch, 2006).

2.3 Opportunities

Costa coffee has several opportunities to increase its market share. Firstly,there is a ready market for the firm’s products in the UK market(Kolk,2012). A ready market heps the company to sell its products quickly. In addition, since there is a ready market Costa can charge premium prices for its products.lastly, Costa coffee does not only manage franchises and coffeehouse but also sells some its products which include beer and wine through other retailers, so as to reach a broader group of customers(Kolk, 2012).

2.4 Threats

Costa Coffee experience intense competition from big coffeehouse chains such as Café Coffee Day, Mochas, Barista and the local cafes. Most of the Costa’s competitors provide more suited menu at a lower price for its customers, such a competition has affected the profitability of Costa. Economic recession affect the economic concerns; loss of employment and lower incomes, it reduces the buying power of the buyers(Carlsen, 2000).

4.0 Discussion of the strategic position and strategy

Strategic position refers to a position that is taken by a firm to gain competitive advantage at the present and the future. Strategic position involves creating optimal strategies based on the goals of the company. According to Porter (1980), a firm’s strategic position is given by its choice of competitive advantage, differentiation or cost leadership and its choice of competitive scope (Porter, 1985). Therefore, an organisation can take four different strategic positions as shown in the diagram below.

Figure 3: Porter’s generic strategies

Source: Sharp and Dawes (1996)

Costa Coffee positions itself using the differentiation strategy in the UK market. As a coffee maker, Costa Coffee differs from other companies in the coffee industry through the provision of quality products and services. Costa Coffee aims to be unique in the coffee industry along dimensions that are valued by the buyers. Such dimensions include provision of premium music, perfectly blended coffee, warm atmosphere and friendly staff. The dimensions have also enabled the company to provide incomparable customer service. Unlike other companies in the brewing coffee industry in UK, Costa coffee has differentiated its products line to include foods, ice creams, sodas and tea. This has enabled the company to gain a large market share (Whttington, 2000). For such products to be of high quality and unique there are certain additional costs that are involved and they include high spending on advertising to promote a differentiated brand image of the products. Hence, the reason as to why the products should be of high quality. Costa Coffee uses differentiation strategy because UK’s customers have particular needs that are possibly under-served. Some of the key disadvantages of the approach include the fact that the company may fail to estimate if the extra costs used in the differentiation which can be recovered from the customers through premium pricing(Sharp and Dawes, 1996). Lastly, successful differentiation strategy may attract the rivals of the company to enter the market segment and copy the differentiated products(Sharp and Dawes, 1996).

5.0 Evaluation of the strategic direction

Differentiation strategy has enabled Costa Coffee to provide its customers with a wide variety of unique products. Hence, the strategy has helped the company to gain competitive edge its market scope. Despite these advantages, Costa Coffee has realised that the strategy may make it to lose its market share in the future. The reasons behind this include the strategy may attract the rivals of the company to enter into the market segment and copy the differentiated products. The other reason is that the company finds it difficult to estimate if the extra costs used in the differentiation can be recovered from the customers through premium pricing. Hence the company is tending towards focused differentiation strategy so as to gain a complete competitive advantage in the market segment.

Focused differentiation helps to provide unique products and services to a smaller market (Johnson, Scholes and Wittington, 2010). Costa Coffee is now using focused differentiation strategy to offer unique products and services that satisfy the demands of a narrow market so as to minimise the extra additional cost that is used in the differentiation strategy. Costa Coffee uses its effort to concentrate on individual sales channel such as selling over the internet only. The unique products and services that are provided by the company are now specialised. Through the strategy, Costa Coffee is able to charge high prices than what it could charge when using the differentiation strategy. Focused differentiation helps the company to develop tremendous expertise on the goods and services that it offers. The strategy also helps Costa Coffee to have product knowledge of the market. Product knowledge is what deters new entrants and rivals from competing in the market. Lastly, the strategy helps the company to spend less amount of money when differentiating products, this is because it targets a small section of the market (Koll, 2002).

6.0 Conclusion

Firstly, the report does both the internal and external analysis of the company using the SWOT framework. Secondly, the report does the internal environmental analysis using PESTEL framework. Lastly, the report does the Porter’s generic strategy. From the analysis, the following conclusion can be drawn. The company’s SWOT analysis shows that it has established a strong enterprise. The company has more strengths than weaknesses, and that is pretty good. Costa Coffee uses differentiation strategy to provide unique and high-quality products and services at a premium price. The external factors that affect Costa Coffee are in two aspects. The first aspect is the political, economic, social and technological environment in the UK market. The technological and political drivers are positive while the social and the economic drivers are negative. The second aspect is the competitive force in the UK coffee industry which involve threats of new entrants. Lastly, Costa Coffee uses differentiation strategy to gain competitive advantage in the market scope. The author of the report suggests that in order for the company to gain a complete competitive advantage it should implement focused differentiation strategy.

7.0 Recommendations

Costa Coffee should continue to provide its customers with premium music, perfectly blended coffee, friendly staff and warm atmosphere so as to continue gaining competitive advantage in the market segment. The company should make good use of its brand name to gain competitive advantage over its main competitors. Costa Coffee should continue to make good use of the ready market in the UK to increase its productivity. The company should also continue to make proper use of the amicable political environment to increase its productivity. Health related issues are making people to tend away from the usage of coffee and; hence, the company should continue to sell tea, fresh juice, de-caf drinks foods, ice creams, and sodas. Costa Coffee should use focused differentiation strategy so as to gain complete competitive advantage. Focused differentiation strategy hinders the rivals of the company and the new entrants from participating in the market. The only way that the business can reduce competition and threats of new entrants is to build a sound system of flexibility that is ready for changes in the market, conflicts and policy. Such a system will be able to cope with these challenges at any time and place.

8.0 References

Aeschbacher, H. (1988)‘Mutagenicity of Coffee’,In Coffee. Physiology, 3, pp. 195–213.

Agius, H. and Angelides, M. (1997) ‘Desktop video conferencing in the organisation’, Information & Management, 31 (6), pp. 291- 302

BBC News (2014) Economy tracker: Inflation. Available at: http://www.bbc.com/news/10612209 (Accessed: 2 December 2014)

Cano-Marquina, A. Tarín, J. and Cano, A. (2013) ‘The impact of coffee on health’, Maturitas 75(1), pp. 7-21.

Carlsen, F. (2000) ‘Unemployment, inflation and government popularity – are there partisan effects?’ In Electoral Studies 19(2), pp. 141–150.

Fletcher, S. Potts, S. Heeps, C. and Pike, K. (2009) ‘Public awareness of marine environmental issues in the UK’, Marine Policy, 33(2), pp. 370–375.

Glaister, K. and Hughes, J. (2008) ‘Corporate strategy formulation and taxation: Evidence from UK firms’, British Journal of Management, 19(1), pp.33–48.

Johnson, G. Scholes, K. and Wittington, R (2010) Exploring Corporate Strategy. London: Pearson Education Ltd.

Kolk, A. (2012) ‘Towards a Sustainable Coffee Market: Paradoxes Faced by a Multinational Company’, Corporate Social Responsibility and Environmental Management, 19(2), pp. 79–89.

Koll, O. (2002) ‘The Strategy-Focused Organization’, Journal of Business Research.5 (1), pp.40-57.

Liang, A. and Lim, W. (2011) ‘Exploring the online buying behavior of specialty food shoppers’, International Journal of Hospitality Management, 30(4), pp. 855–865.

Lynch, R. (2006) Corporate Strategy. London: Pitman Publishing.

Mortimer, R. (2011) ‘Costa coffee comes with shot of customer insight’, Marketing Week 34(40), pp.18–23.

Owens, S. (2010) ‘Learning across levels of governance: Expert advice and the adoption of carbon dioxide emissions reduction targets in the UK’, Global Environmental Change, 20(1), pp. 394–401.

Porter, M.E. (1980) Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: The Free Press.

Porter, M.E. (1985) Competitive Advantage. New York: The Free Press.

Sharp, B. and Dawes, J. (1996) “Is Differentiation Optional? A Critique of Porter’s Generic Strategy Typology”. Management, Marketing, and the Competitive Process. London: Edward Elgar

Universities UK. (2011) ‘Patterns of higher education institutions in the UK’, Higher Education pp. 108-112

Whttington, R. (2000) What is Strategy and How does it Matter. London: Thompson Learning.

World Bank (2014) United Kingdom. Available at: http://data.worldbank.org/country/united-kingdom (Accessed: 1 December 2014).

9.0 Appendices

SWOT Analysis Summary

Strengths	Weaknesses	Opportunities	Threats
Strong brand Friendly staff Provides a range of products	Negative publicity Fluctuation of the price of coffee beans	Ready market Sell of the products through other retailers	Stiff competition Economic recession