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Option 1: Theory and Practice

Costa Coffee: External Environment- analysis...........................................................................3
Case study and business risk:...................................................................................................5
Recovery plan through Porters Five Forces strategy in practices...........................................6
Compare theory and practice.......................................................................................................6
Michael Porters introduced the 5 forces model for industry competition...........................7
Porters Value Chain Model......................................................................................................9

This particular report would focus on studying the strategic management plan of the British
multinational coffeehouse company Costa Coffee that helped the organization to evolve as the
number one coffee brand in UK in 2012. Founded in 1971 by the Cost family to serve
specialized Italian coffee, the brand soon became peoples favourite in and around London by
1978. With a vision of becoming the number one coffee chain in the world, the small venture was
first acquired by Whitebread Plc in 1995 and launched countless coffee stores around Britain. By
1999, the brand was equipped to launch its international expansion plan, and opened its first
store in Dubai. Since 1999, it continued to grow at the international platform, and today it has
more than 1300 stores in UK and over 2,865 stores across 41 countries in the world. This report
would therefore study ways in which the company grew rapidly and its success strategy that
enabled the brand to overtake the rival brand Starbucks by 2007and become the largest coffee
shop brand in UK (Ansoff, 2008). However, with time Costa became the leading coffee chain in
UK by overtaking the market share and business of the coffee chain leaders, Starbucks which
was the largest coffee chain in the world. Hence, the report would study the growth strategies by
evaluating the PESTEL model, compare the theory and practice in relation to the business
development plan with Porters five forces analysis. The study would help in evaluating the
models in a better way and finally the way company achieved success or study if it had faced any
issues during business expansion and had to adapt risk management strategy or recovery plan or
Costa Coffee: External Environment- analysis
Costa Coffee is the largest coffee chain in Europe that is known for offering specialized Italian
blends to people around the world. It was the second largest brand in the UK market, however
with a vision to become the number one brand in UK, it successfully acquired 37.6% market
share by the end of 2010. As far as the present market situation is concerned, the external audit,
carried out by PESTEL analysis enables the researcher to understand ways in which the company
successfully reached its goals by the end of 2010 and became the number one coffee brand in UK
by overtaking the coffee leaders and rival group Starbucks coffee (Costa, 2015).
As far as the external evaluation is concerned the PESTEL would help in identifying the risks
that was looming in the market after the changes in the scenario in 2010, the analysis below, that

is focused at the standard key factors such as political, social, economic, technology, legal and
environmental would be studied to understand ways in which the external analysis helped in
appropriate strategy development (Costa Neves. and Garland, 2010).
Political: The sudden change in the political situation in UK 2010, was caused by the coalition
government. The tax policy changes impacted on the poll rating of the party. In the past two
years the rates of the VAT (Value Added Tax) rate also fluctuated, it was reduced from 17.5% to
15% and then again exceeded to 17.5% in the latter half of 2011. The low VAT rate encouraged
in offering products at a low rate to the Costa consumers. However, with the increase in the rate
the management failed to maintain the price rate and hence the product rate was increased at the
same time. Such a change in the pricing, or increase in overall product rating could lead to
discourage consumers from buying expensive items and impact negatively on business (Dess and
Miller, 2004).
Economic: Due to the economic downturn, the UK government has reduced the VAT rate in
2008-2009. This policy was further supported by modifying the cost price of the product so that
the product sale increases and both the companies as well as government could earn through
either tax collection or product sale. However, the recession impacted severely, and people lost
jobs. There was a sharp rise in the unemployment during the economic crisis which affected the
purchasing power of the consumer and companies suffered from a sharp drop in the regular
business or product sale. In such a situation when in 2010, the VAT rate increased and purchasing
power of people decreased steeply, team Costa coffee in this business environment aimed at
reducing the price of the products to maintain business in the market. However, by lowering the
product price the profit level of the organization suffered exceptionally (Fridell, 2011). Hence,
they incorporated changes in the menu and also implemented cost reduction technique to retain
Social: the increase in population offered tremendous scope for business enhancement. People
today have become aware of quality hence, they have increased the standard of services, quality
control enhancement strategy and hence improved the overall product line. Apart from this when
they expanded the business at a rapid pace, they focused at understanding the taste and
preference of the college and university and introduced new menu catering to the student sector.
Besides this the change in the working environment has also impacted on the business. Attitude

of the people has changed, today irrespective of age people used laptop and a variety of gadgets
to work and consider coffee shops as places for informal meetings. Hence Costa coffee went into
a partnership with the bookshops and adapted to the social changes to offer coffee while reading
books inside the store (, 2013).
Technological: the development of new technology has also helped the organisation to grow and
thrive in the market. The implementation of technology, such as investment in high end
equipment helped in improving the services by incorporating new items in the menu. Besides
this the implementation of the EPOS system or the Electronic Point of Sales technology was first
installed in 2010 and helped in increasing the efficiency of the retail sales. Apart from this the
software and other devices like computer, etc helped in activities such as billing, maintenance of
logistic, report writing and monitoring the accounts through financial software such as Matrix or
Excel (Hunger and Wheelen, 2005).
Environmental: Costa has indulged into corporate social responsible approaches to ensure
implementation of ethical means for business enhancement. The CSR activities like promoting
recycled coffee cups, helping in children education among the coffee farmers in Brazil and other
nature protecting activities helped the brand gain an edge in the competitive market. The CSR
activities typically aimed at promoting that the company does not aims at making profit by
selling products, it also aims at helping the society to grow and have taken relevant approaches
to carry out the business in an ethical way (Monaghan and Huffaker, 2008).
Legal: Costa coffee has adhered to the business standards, followed the employment laws and
also legislation of the country. They have forever adhered to implement ways of improving
safety as well as the health conditions of the employee and the consumers at the same time.
Case study and business risk:
The vision of the Costa coffee was to evolve as the best hospitality company with a mission to
serve the best coffee in the true Italian style. Their core objective after opening it first
international store in Dubai in 1999, was to increase product sale, accelerate market share,
increase the return on investment and profitability of the organization by 2010 and emerge as the
leading brand in the market by overtaking the sale of Starbucks coffee (Sadler, 2003). Besides
this, the recession affected the business in various ways and also impacted on the overall sale and
profitability. The increase of Government tax affected the product costing and business

management. Hence they aimed at acquiring new customers by penetrating new domains, such
as opening coffee shops inside the bookstore, university and college canteens etc. Further
improving the customer services was also decided to help in enhancing the overall customer base
after the economic downturn.
Thus studying the theory of PESTEL to evaluate the external environment, helped in identifying
that issues which impacted on the business during the economic downturn and ways in which the
company identified strategy to overcome the problems thrusted upon by the policy change, tax
changes, economic downturn and change in consumer behavior due to such financial
modification (Saloner et al. 2001). While these issues were slowly affecting the business, soon
after they expanded the business at the internal platform, the management incorporated unique
plans to recover from the advancing business risks and grow in the market to evolve as the
leading coffee brand in UK market.
Recovery plan through Porters Five Forces strategy in practices
It was the distinct vision which was the first strategy to recover from the issues faced during the
UK tax policy changed. The company introduced a fresh marketing strategy to grow rapidly in
the European market by aggressively opening new coffee outlets in universities, hospitals as well
as at the transport interchanges. It has further started operating about 442 stores around the
different parts of the globe and is continuously growing. The rapid growing strategy was focused
at achieving the objectives by the end of next 3 years time. With a vision to become the number
one coffee company they implemented the Porters Five Forces strategy to understand the theory
and evaluate it through its practices in the particular situation. In this plan they set new
objectives to meet with the business expectation; (i) target market as well as market
segmentation, (ii) grow through partnership, (iii) emphasize on developing quality innovative
and quality products, (iv) effective operation to decrease the overall expenditure (Ukers, 2008).
Compare theory and practice
Coffee market in UK is highly competitive and exceptionally large. People in Britain prefers
drinking coffee along with their breakfast and also during the different time of the day. Brands
Starbuck and Costa coffee are the two premium rival brands in the coffee market in UK. In order
to grow in the UK market in an innovative manner and evolve as market leaders in next three
years, the company Costa coffee adapted the Porters five forces model to evaluate the

competition and then implement innovative technologies to get competitive advantage in the
market (Ansoff, 2008).
Michael Porters introduced the 5 forces model for industry competition.

Figure 1: Porters Five Forces

Source: Costa, 2015
Threats of new entry: threats from new entry was low in the UK market. Since brand Costa
Coffee was a prominent name in the coffee market and was immediately after the Starbucks, the
market leaders in the coffee industry, the threats from new brands was relatively low. Established
in 1971 London is worth about 5.4 billion today. Hence, it may be mentioned that Costa has a
niche clientele and is continuously growing around the world since 1999. It is known for
innovative blends, unique snack items and specialized services. The new business models that
were adopted such as, opening outlets at an aggressive rate around the universities, colleges etc.
would enable it to grow business even further with the innovative quick consumable menu
(Costa Neves. and Garland, 2010).

Supplier Power: since the demand of coffee is relatively very high at the global perspective and
at the same time the coffee beans are produced only at a particular geographical areas. It is due to
this situation the bargaining power of the suppliers are constantly increasing. It has been often
identified that the African coffee producers are often treated unfairly by most of the multinational
companies and some of the non-government organisations are intervening to handle the situation
and solve the issue. It is due to this situation the bargaining power of suppliers are constantly
increasing (Dess and Miller, 2004).
Buyer power: the buyer power evaluates on the issue that the how far the consumers are able to
buy the products of the respective company. As far as the particular situation is considered, in
2008 and 2009, during the recession affected condition, most people lost jobs and their buying
ability reduced. In the same period, however, the VAT was increased after fluctuating for some
time in the UK. Hence such issues impacted on the overall buying power of the target consumer.
People who now had limited earning could rarely spend on additional issues like food and coffee
or hang-out, hence the buying power decreased (Fridell, 2011). The rise of the tax, impacted on
the product pricing, this however was again a problem for the organization, as the rise of product
price led to decrease in product sale in the post-recession affected market. In the same period to
overcome the issue, the management reworked on the menu so as to offer quality products at an
affordable rate. Therefore it may be mentioned here that the threat from buying power was high
and buyer power as such as low in the present condition, however the company adapted to
various strategies to help in overcoming the problem (, 2013).
Threat of substitute: threats from substitute is high as the main coffee players in UK are Costa,
Starbucks and Caf Nero. Starbucks was the market leaders in the European domain, it is the
attempt of the Costa to evolve as the market leaders by employing aggressive marketing strategy
as mentioned (Hunger and Wheelen, 2005).
Hence after the evaluation of the Porters Five Forces it may be mentioned that the company
successfully evaluated the situation and developed strategies such as launching new product line
to fresh target audience such as university and book store, college canteen etc. The strategy was
to develop new innovative product line for the young age group so that they could successfully
attract new target audience and enhance product sale by increasing the clientele (Ansoff, 2008).

The strategies proved immense successful, and helped Costa coffee evolved as the leading brand
in the UK coffee market. Costa coffee was awarded as Best Coffee Chain, UK & IE and Best
Coffee Chain, Europe at the European Coffee Awards 2012. Thus the adequate implementation
of the market evaluation theories and critical models like Porter have enabled team Costa coffee
to proceed systematically in the identified domain and become the market leaders within the span
of 3 years time.
Porters Value Chain Model
Michael Porters Value Chain was used to evaluate the various activities of the organization that
it performs on daily basis and then link it with the organisations competitive position. It is with
the help of this model that the activities of within the Costa coffee as well as around the
organization could be studied and then evaluated in respect to the competitive strength of the
organisation. In, short it may be mentioned that it evaluates which value each particular
activity adds to the organisations product or services. The model help in understanding the
differences between the primary and support activities. The Primary activities are directly
connected with the delivery of the services (Monaghan and Huffaker, 2008). These are grouped
under the five key heads, such as inbound logistics, operation, outbound logistics, marketing and
sales and service. These primary activities are connected to support the activities that help in
improving the efficiency of the company. There are four key areas of support activities, such as
procurement, technology development, human resource management and infrastructure.

Figure 2: Value Chain

Source: Pita et al. 2004
Primary activities
Inbound logistics: the inbound logistics of Costa coffee connotes to the concept of selecting the
finest quality coffee beans by the selected buyers from the producers based in Latin America,
Africa and areas in Asia. They grow the finest quality beans that are produced and then
transported to respective sites that are then processed and roasted for packaged sale. The
company maintains high quality standard and it is these beans that they use for brewing up the
Operations: the operations of Costa coffee is spread around the different parts of the world.
China alone has 300 outlets and is found in 41 different countries with more than 2000 stores
worldwide. This UK based brand has rapidly expanded over the years (Sadler, 2003).
Outbound logistics: there are very little scope of intermediaries in the product selling. The
products are sold in a recognized manner through the licensed stores only.


Marketing and sales: team Costa have focused in aggressive marketing for rapid growth and
sustainability. In order to meet the growing demand of the new clientele, they have focused on
launching new student friendly items, innovative menu, interactive and mouth-watering items.
Service: with an attempt to serve the best Italian coffee to the customers, team Costa coffee has
forever concentrated on the services to the customer. The outlets are warm and offer complete
relaxation zone to the customers. The staffs are educated and offer quality services in a friendly
way (Pita et al. 2004).
Support activities
Infrastructure: this area includes the various departments such as the finance, legal, management,
etc. to help in keeping in line with the operation in a systematic manner. The stores of the
company are properly completed with adequate customer services and dedicated team of
Human Resource Management: the company has a group of dedicated work force, who are
extremely creative and innovative by nature. They serve quality blends to attract customers.
Technology development: they have incorporated technology to offer better services, such as
enhanced machines, improved computer system and also used the digital technology for
marketing and promotion campaign in a systematic manner (Sadler, 2003).
Procurement: it is here the company uses the raw material and transfer those to final product,
such as the agents of the company travels to distant geographical location for the procurement of
high grade raw material and offer finest coffee blends to the customers (Saloner et al. 2001).
Thus it may be mentioned that the concept of Value chain help in understanding the essential
activities from the wasteful activities so that the effective strategies may be developed to meet
with the company objectives.

After completing the study on the theory and practice of the specific model of Michael Porters
Value Chain, it may be mentioned that the company Costa Coffee successfully achieved its goal


of becoming the market leaders in 2010 in UK coffee sector by overtaking the market share of
Starbucks in a strategic manner. Besides this the company in spite of facing issues due to the
change in the tax policy, and the economic downturn, grew at a rapid pace due to innovative
marketing techniques and unique planning.

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