INTEGRATED CASE STUDY (MAF 671)

PAIR WRITE-UP FOR CASE 1

THE TURNAROUND OF MUDDY CHILD CAFE

QUESTION:

Porter's Five Forces is a simple but powerful tool that is commonly used to
analyze the forces affecting a certain industry’s business. Understanding
these forces can help a business design and adjust its corporate strategy,
improve profitability, and remain competitive in the market.

Prepared by:

NAME MATRIC NO.

NURUL NADIA BINTI MUHAMAD 2018226198

SITI NUR AYUNIE BT ZAWAWI 2018659888

Submission date: 3rd June 2022

Prepared for: Madam Junaidah Hanim Ahmad

 CONTENT

Pages

Introduction of Muddy Child Cafe 1

With reference to the model and the café industry:

2
A. Comment on the level of bargaining power of both suppliers and
buyers for Muddy Child Café.

3
B. Discuss how Muddy Child Café can protect itself from the threats of
new entrants and substitute products.

4
C.Provide TWO (2) practical suggestions on how Muddy Chile Café can
compete within the industry in order to sustain its business.

Conclusion 5

References 6

Introduction
Porter's Five Forces is a business analysis model that explains why different industries can
maintain different levels of profitability. In 1980, Michael E. Porter had introduced the concept in
the book titled "Competitive Strategy: Techniques for Analyzing Industries and Competitors".
The Five Forces model is commonly used to examine a company's industry structure and
corporate strategy. With certain caveats, Porter identified five undeniable forces that shape
every market and business in the world. The five forces are widely used to assess an industry's
or market's competitiveness, attractiveness, and profitability.

This case study is about the failure of the emerging business strategies that were introduced by
Muddy Child Cafe to put itself into the coffee industry of the United States America (US) in
2011. The case is to be analyzed using the Porter's Five Forces which comprises competition in
the industry, potential of new entrants into the industry, power of suppliers, power of buyers,
threat of substitute products. From the internal view, the factors that led to the failure of the
Muddy Child Cafe product line were weak customer value propositions and lack of product
competitiveness. Muddy Mom's public perception includes a strong fast food chain element,
making it unattractive to luxury coffee drinkers.

This issue is worsened by the fast food-oriented premise operation which is fast food oriented
such as lack of baristas preparing the coffee, bright lightings and the general layout of the outlet.
Furthermore, the company's low-cost strategy limits the number of product features it can
provide. In comparison to other competitors in the coffee drinks sector, there is also a lack of
product customization. The coffee market in the US was still immature and there are different
preferences between the Australian and the US communities.This restricts Muddy Child Café's
reach, particularly among low and middle income demographics.
With reference to the model and the café industry:

A. Comment on the level of bargaining power of both suppliers and buyers for Muddy
Child Café.

Suppliers influence Muddy Child Cafe’s in terms of the company’s production capacity based on
the availability of raw materials. This element of the Five Forces analysis model shows the
impact of suppliers on firms and the fast food restaurant industry environment. (Lawrence
Gregory,2018). The bargaining power of suppliers in Muddy Child Cafe was low as the
companies are strong and they have a large number of suppliers to buy from. Many companies
produce their own coffee beans which are the main ingredients of the coffee. The company has
the option of purchasing from various suppliers. When there are many suppliers or low switching
costs between rival suppliers, a company can keep its input costs lower and puts the company
in a dominant position. It helped the Muddy Child Cafe to save their cost by choosing the lower
price from the supplier. When doing an analysis of supplier power in an industry, low supplier
power creates a more attractive industry and increases profit potential, as buyers are not
constrained by suppliers. (CFI Education Inc,2015 to 2022)

This element of the Five Forces analysis deals with the influence and demands of consumers,
and how their decisions impact businesses. (Lawrence Gregory,2018). Muddy Child Cafe was
facing a high bargaining power of buyers due to the presence of many coffee providers without
having any radical differentiation. Customers do have loyalty to brands, but the commitment is
not strong enough, and the switching behaviour of the customers in the coffee is high with low
or no switching cost. The buyers have options to choose from multiple international and local
brands that keep the power of the buyers high, and the companies make offers based on their
bargaining power. The headquarters of Muddy Child Cafe was not aware about the customers’
preferences due to lack of surveys made. Hence, the product line was weak in customer value
proposition because headquarters has decided to promote mocha, oreo mocha, and mocha
chips in the adult working area of the office. It was clear that the promotion does not match the
taste of customers who prefer bitter coffee drinks.
B. Discuss how Muddy Child Café can protect itself from the threats of new entrants and
substitute products.

With value chain analysis, Muddy Child Cafe can take steps to create a competitive advantage,
improve efficiency, and increase profit margins. Competitive advantage is what sets company
business apart from competitors. To develop an advantage, Muddy Child Cafe needs a clear
idea of their target market. (Meredith Hart,2022). Muddy Child Cafe can protect itself from the
threat of new entrants by a high production-profitability threshold requirement, or economy of
scale, is an entry barrier that can lower the threat of entry. Highly differentiated products or well-
known brand names are both barriers to entry that can lower the threat of new entrants. Muddy
Child Cafe’s competitor, Dom’ Donuts and Starbasket had partnered with a giant consumer
goods corporation and a popular beverage maker subsequently, in doing their business. While
Muddy Child Cafe only depends on their parent company. They didn't work with other big
consumer goods corporations. Besides depending on their parent company, Muddy Child Cafe
should practice autonomous management on their subsidiaries to give authority towards Muddy
Child Cafe in managing their own processes to create their own strategies in ensuring the
successfulness of the cafe instead of having work details controlled by Muddy Mum.
Nevertheless, Muddy Mom has invested in Muddy Child Cafe a substantial amount of capital,
time and resources to build its brand name, something which will be quite difficult for new
entries to achieve.

A low threat of substitute products makes an industry more attractive. In addition, it increases
profit potential for the firms in the industry. Conversely, a high threat of substitute products
makes an industry less attractive. (Dan, 2015). In this case, Muddy Child Cafe can protect itself
from the threats of substitute products when perceived cost advantage. Muddy Child Cafe was
facing a high threat of substitutes for the coffee industry because of the availability of multiple
substitutes. The number of coffee substitutes is growing, which poses a threat to the coffee
industry. However, the goal of a cost advantage strategy is to become the lowest-cost provider
in the company industry or market. Muddy Child Cafe uses the low pricing strategy by offering
lower coffee prices than their competitors. As a result, Muddy Child Cafe gained a price
advantage over the competition. Next, Muddy Child needs to be concerned with the coffee
available to protect the substitute product by serving appropriate coffee that is suitable with the
people in the specific place. They can conduct research on the favorite coffee of the community
in the US in order to gain a place in the hearts of the customers in the US.
C.Provide TWO (2) practical suggestions on how Muddy Chile Café can compete within
the industry in order to sustain its business.

1) Build customer’s loyalty

Customer loyalty is a customer’s likelihood of doing repeat business with the company. This
stems from customer satisfaction and outweighs availability, pricing, and other factors that
typically impact buying decisions. When a customer is loyal to a product, service, or brand, they
are willing to wait for a restock or spend a little extra money for it. Launching loyalty cards is
also a good recommendation for Muddy Child Cafe to compete within the industry. This is one
of the efforts to retain customers. But, make sure it is a quality card that will last the wear and
tear and look good in a customer's wallet like a very exclusive card. Nothing better than seeing
a customer's face light up when you give them seven and get the eighth one free using the
loyalty card. Moreover, Customers who return spend more than new customers. Existing
customers tend to spend more money than new customers because they already trust your
company and its products or services. In fact, the amount they spend usually increases with the
length of time they do business with your brand.

2) Create seasonal drinks

If Muddy Child Cafe offers the same-old, same-old drinks, month after month then there’s little
incentive for new competitors to come through their doors, especially if the coffee shop down
the street is offering seasonally-specific brews. Muddy Child must offer something different and
unique to their customers so that they can be different compared to other coffee shops. One of
the incentives is they can play of the flavors and taste of the season, such as offering pumpkin
spice drinks come fall and floral-infused coffees when spring comes around. If their customers
found the difference in their coffee shop, they will always be eager to wait for another season to
try something new. They probably will ask their family and friends to try the coffee too. This will
help Muddy Child Cafe to remain competitive in the industry compared to other coffee shop that
served same old drinks which their customers might be bored with the same taste of coffee and
they will chose to buy coffee at Muddy Child Cafe instead of other coffee shop even though they
need to spend more money to get the coffee with the unique and best quality.
Conclusion

According to the case study, Muddy Child Café failed to meet its financial and market share
targets in its first year in the United States. They primarily focus on providing customers with
high-quality coffee at lower prices than their main competitors. However, the low-cost strategy
was a colossal failure. The company was perplexed as to how it was losing money when it was
so popular in other parts of the world and had Muddy Mom on their side. Muddy Child Café's
management team decided to revisit the entire company in order to reclaim the US market after
careful consideration. They concentrate on delivering value by focusing on what the customers
want. They did not focus on the cost of the materials, instead the quality of the materials which
is handled by the Purchasing team. Fortunately, the entire rebranding was a huge success, as a
market survey revealed that Muddy Child Café was rated higher than the industry's big three in
terms of taste and customer preference.

Moreover, Muddy Child Cafe can easily expand its footprint into many new markets around the
world by leveraging its strong brand name and network, as well as the financial support of
Muddy Mom. However, because Muddy Mom's original branding differs from Muddy Child Cafe
in terms of the operating environment, Muddy Child Cafe must adapt the design of its premises
to cater to the preferences of its targeted consumers. The entire Muddy Child Café rebranding
process took eight years before they were able to successfully tap into the market of low and
middle income earners. In conclusion, Global customer preferences differ across geographical
areas. As a consequence, Muddy Child Cafe had to carefully craft its strategies when expanding
their cafe network to more parts of the world.
 References

1) Bruce Hakutizwi, (2022) 5 Impactful Ways to Grow Your Coffee Business This Year.
Available at: https://articles.bplans.com/5-impactful-ways-to-grow-your-coffee-business-
this-year/

2) CFI Education Inc, (2015 to 2022) Bargaining Power of Suppliers. Available at:
https://corporatefinanceinstitute.com/resources/knowledge/strategy/bargaining-power-of-
suppliers/

3) Dan, (2013) Threat of New Entrants (one of Porter’s Five Forces). Available at:
https://strategiccfo.com/articles/financial-leadership/threat-of-new-entrants-one-of-
porters-five-forces/

4) Doron Vermaat (2018) 10 Ideas to Attract New Customers In Your Coffee Shop.
Available at
https://blog.loopyloyalty.com/10-ideas-to-attract-new-customers-in-your-coffee-shop-
7cbcd31ce42c

5) Integrated Case Studies for Accounting (2019), Oxford University Press. Available at:
https://cw.oxfordfajar.com.my/publicaccess/intcasesacctg/resourcelibrary/file/Integrated
%20Case%20Studies%20for%20Accounting/SM/Case27.pdf

6) Lawrence Gregory, (2018) McDonald’s Five Forces Analysis (Porter’s Model) &
Recommendations. Available at:
http://panmore.com/author/lawrence-gregory

7) Meredith Hart, (2022) The Straightforward Guide to Value Chain Analysis. Available at:
https://blog.hubspot.com/sales/value-chain-analysis

8) Sean Peek (2022) Business News Daily. Available at:

https://www.businessnewsdaily.com/16017-build-customer-loyalty.html