The coffee shop industry has become a target for investors due to the increasing consumption and thus demands for coffee. The UK has seen a 7. 5% growth rate in 2012 despite being a tea-oriented society (Hospital & Catering News, 2013).
Although there is a low barrier of entry into the cafe and coffee industry, there a myriad of factors that needs to be taken into consideration in order for a new entrant to survive in the already crowded market, including large coffeehouse chains such as Starbucks and Costa.To increase survivability, a new entrant must take into account, the perspective of internal and external environments towards starting a coffee shop/cafe business. Using PESTEL analysis and Porter’s 5 Forces to evaluate the external environment, considerations for the achievement of competitive advantage with regards to the internal environment, and SWOT analysis to “evaluate the nature of the business environment and its strategic capability”, this essay will discuss the importance of these factors for new entrants.External EnvironmentA firm’s proficiency depends on the factors that govern the external environment (micro-environment and macro-environment), which is not within its control but has to be adapted to. Macro-environment can be analyzed using PESTEL analysis, comprised of political, economic, socio-cultural, technological, environmental, and legal factors (Armstrong and Kotler, 2013).
The coffee shop industry is not heavily affected by the political environment because it does not rely on imports and exports that could be hindered by import restrictions and other types of control enforced by the government due to the relatively common and lax product/service like coffee which is abundant on the market (Lee and Carter, 2012). Since coffee products are not a restricted good, there are no legal issues which would affect coffee shops, albeit some permits may be required to operate a coffee shop in some countries.Technology can be a great asset that provides opportunities for marketers; however, it does not play a vital role in the coffee shop industry due to the fact that the form of technology utilized in coffee shops are rudimentary machinery such as espresso machines, blenders, wifi, and television. Nevertheless, using social media to advertise an emerging company can provide an opportunity for the company to become widely known ((Davison. et. al, 2011).
Being environmentally conscious by using recycled materials shows social responsibility can also benefit the company.More importantly, economic factors produce noticeable effects on consumer purchasing power and spending patterns (Armstrong and Kotler, 2013). For instance, the confidence of consumers and businesses influences trade volume and growth (Lee and Carter, 2012), whether a consumer would purchase coffee, which could be an obstacle for its survivability in the market. Contrarily, if there is an expansion trend, it would aid in the success of the business (Sobel.
et. al, 2006). The socio-cultural environment is complex because it is dependent on the culture and income of the population (Lee and Carter, 2012).Therefore, the demographic indicative of the coffee consumer is correlated to the demand of coffee.
Culture also has a great impact on business because it affects the preferences of people towards a product. Forces that affect culture include tradition, values, and attitudes within a society (Jobber and Ellis-Chadwick, 2013). The five competitive forces of the microenvironment are identified using the Porter’s 5 forces analysis model: threat of new entrants and substitute products, bargaining power of buyers and suppliers, and rivalry amongst competing firms, which shape and determine the company’s opportunity and threats (Baines et al. 2011). The cafe and coffee shop industry can be considered as a monopolistic market because its market structure contains a large number of firms competing on the same class of products, rivaling in quality, price, and marketing to differentiate each company, where firms can freely enter or exit the market which are assumptions of a monopolistic market (Parkin.
et. al, 2012).Current companies can be threatened because firms can enter into the market easily due to the low barrier and although there is differentiation within the industry, there is a large pool of substitutes (e. g. tea, milk, energy drink etc.
)(Diaz, 2012), therefore companies must take these factors into consideration. The consumer will also have a high level of bargaining power because of the variety of choices in the market so companies must compete to gain the consumer’s loyalty in order to keep market share.Another obstacle is the negotiation with suppliers to obtain the lowest cost as a new firm against established companies who already holds market share. The optimal solution is to internally source raw materials like coffee beans that also reduce cost. Each firm’s market share is limited, supplying only a small part of the total industry output, causing high competition amongst rivaling firms (Parkin.
et. al, 2012). Consequently, a coffeehouse’s uniqueness in taste and/or service can attract customers towards their product.Internal EnvironmentThe competence-based approach classifies resources as tangible and intangible resources (Hollensen, 2012). Tangible resources such as coffee machines and raw materials are inputs that can be quantified and seen/touched.
Intangible resources include brand image and systemic operation that affect the firm’s reputation and customer loyalty. Resources in general can be categorized into six types according to Hollensen (2012): technological, financial, physical, human, organizational, and reputation.These resources in combination are utilized to develop and sustain positional advantage depending on how proficient resources are allocated to increase their capabilities like providing the best service, creating an inviting atmosphere or a unique product. Whether or not capabilities can be considered core competences depend on if the pooled knowledge and technical capacities allow the company to gain competitive advantage (Hollensen, 2012).
It should also be hard for competitors to replicate, substitute, replace, or move (employees) (Hollensen, 2012).+Competitive advantage does not necessary mean that the company needs to have superiority in all areas of business, but acknowledges the most vital capability to be within their control, leaving less critical capabilities possibly to be outsourced (Stonehouse et al. , 2004). However, it does require that the product is superior to competitors not only delivering good value and quality.
This means that to achieve competitive advantage, products must be exclusive to your company, for example, a blend of coffee that can only be purchased at your store or a proprietary formula for your drinks that is unique to the company’s brand.SWOT AnalysisSWOT analysis can be used to discuss the advantages and disadvantages with regards to internal (strengths and weaknesses) and external (opportunities and threats) environments (Mullins, 2010). The strengths of the company stem from its unique product which can be the firm’s competitive advantage or a superior location which contains more foot traffic and provides convenience for the customer. However, as a new entrant, brand image and reputation are its weaknesses, but rigorous marketing can cause widespread recognition.Furthermore, social media has become more prominent (Davison.
et. al, 2011) which can be an opportunity for brand advertisement. Moreover, if the firm can insource raw materials it can reduce cost and generate greater revenues. It also makes the firm independent of the politics involved with countries that grow coffee. Finally, data gathered from 53% of OECD in the first quarter shows that the world in a state of recession (Vuuren, 2013).This factor may deter consumers from purchasing coffee, which threatens the revenues of a company.
The internal and external perspectives considered examine what factors a new entrant into the cafe/coffee shop industry has to face in order to achieve a prevalent stand in the market. PESTEL analysis highlighted the significance of economic and socio-cultural environment on consumer and business confidence towards growth and volume, taking into account the influence of demographics and culture.On the other hand, Porter’s 5 forces identified the issues of competitors, substitute products, threats, and the bargaining power of buyers and suppliers indicating the importance of having a unique taste and service to distinguish a new company in addition to the benefit of insourcing. With regards to the internal environment, comparative advantage gained by having core competences is vital to the success of a new entrant which can be developed through the proficient allocation of resources to create an exclusive, good value and good quality product that is inimitable.
The advantages and disadvantages of the internal and external environment were discussed using SWOT analysis allowing a company to be aware of different factors affecting a new company. With these concerns being carefully considered depending on the degree of significance, a new entrant will be able to start a successful coffee/cafe business.
