Strategy and Entrepreneurship

Business Report
Pratik Shrestha (21240206)

UNIVERSITY OF WEST LONDON

Table of Contents
Executive Summary..........................................................................3
Introduction and Company Overview..................................................3
External Analysis of Costa Coffee.......................................................3
Pestle Analysis................................................................................................................. 3
Political......................................................................................................................... 4
Economic...................................................................................................................... 4
Sociocultural................................................................................................................ 4
Technological............................................................................................................... 4
Legal............................................................................................................................ 4
Ecological..................................................................................................................... 4
Porters 5 forces................................................................................................................ 5
1) The Threat of new entrants...................................................................................... 5
2) The Bargaining power of Suppliers..........................................................................6
3) The Bargaining power of Buyers.............................................................................. 6
4) The threat of product substitution........................................................................... 6
5) Rivalry amongst existing competitors......................................................................7

Internal Analysis of Costa Coffee.......................................................7

Resource Based View....................................................................................................... 7
Valuable....................................................................................................................... 7
Rarity........................................................................................................................... 7
Inimitable..................................................................................................................... 8
Non-substitutable......................................................................................................... 8
Internal audit................................................................................................................... 8

SWOT Analysis.................................................................................. 9
Strength........................................................................................................................... 9
Weakness....................................................................................................................... 10
Opportunities................................................................................................................. 10
Threats........................................................................................................................... 10

Strategy Issues Identified from the Audit and Conclusion..................10

References.....................................................................................11
Appendix 1: Business Strategy Level................................................14
Appendix 2: Strategy Evaluation......................................................14

Executive Summary

The report was set as a determination to develop a business report on a chosen industry, i.e.
Costa Coffee UK and prepare an audit on its internal and external environment. Costa Coffee have
been leaders in supplying coffee in the UK for Decades. The report looks to see the overview of the
company and their competencies as well as their resources. They directly compete with Starbucks,
Caf Nero and thousands of Independent Coffee shops all over the world. This report has been put
together for the purpose of analyzing the internal and external environments of Costa Coffee as a
brand and an international business. Plus, having a look at how their maximum potential has been
reached, overcome any weaknesses and also their threats and opportunities using SWOT analysis.
The business environments will be analyzed using tools such as PESTLE, VRIN, Porters 5 forces
etc. The Audit is ensured to be analyzed critically and concluded in order to move onto
recommendations for the company.

Introduction and Company Overview

Costa coffee is the Largest coffee chain in the UK and second in the world. The UK based company
has over 2000 stores in the UK with additional 1200 overseas. The sister company of Whitbread plc.
Recorded an 17% increase in sales in the first quarter in 2016 (BBC, 2016). The report will give a
direct overview of all the internal and external environments of Costa Coffee. In the end a SWOT
analysis will be conducted as an Audit on the current position of the company. The organizations
success wasnt any where near easy, the foundation to their success was built from their high quality
service, products and dedication. With the research that has been conducted in the report, it can be
seen many Business models that Costa as a company has executed to take the coffee industry by
storm. This report will also be identifying and discussing issues within the company and how the
organization has faced its challenges especially after the change in management in 2016 (Ramskill,
2016). A conclusion based on the issues faced by the company from the various factors from the
environment will end the report.

External Analysis of Costa Coffee

External analysis is a process of scanning and evaluating the external environment of an organization
and the key factors for change in the company. The performance of the organization as well as
further planning for the future can be analysed from the external environment (Johnson, et al., 2014).

Pestle Analysis
PESTLE analysis model is a process of analyzing the external drivers of an industry that include the
political, economic, social, technological, ecological and legal aspects of the industry (CIPD, 2016).
Lynch (2016) believes that PESTEL analysis is a very useful tool that can be used to analyse the
drivers of transformation in the market, taking into consideration the macro-environmental factors of
the industry.

Political
According to the Research and Markets, (2003) changes in legislation, regulations and Government
policies are the main political factors. The regulations and policies in the coffee grown in
developing countries have arouse so many concerns such as child labour, working conditions and

labour costs. Another great impact on the industry has been the tariffs and taxes occurring between
borders whilst trading coffee beans.
Economic
The industry was challenged economically during the recession of 2008, as the disposable income of
the customers wasnt as readily accessible to the businesses. As stated by Lenny et al (2007),
taxation has been proposed as a means of reducing the intake of these beverages and thereby
lowering health care costs. The recovery from the recession began in 2010, still with the VAT being
raised as well as inflation increased prices of products and ingredients.
Sociocultural
Healthy Lifestyle as defined by Bloch (1984), A pathway of preventing any occurrence of Health
Problems and Personal Wellbeing. While the definition could include various attribute, most healthy
lifestyle research has been focused on diet and exercise (Kraft and Goodell, 1993). Lifestyle is a key
element in the sociocultural factor of PESTLE. Following the 2008 recession, in the UK there has
been a rise of the middle class spending. Hence, Businesses within the coffee industry can take
massive advantage of the prospects without alienating any other marketing prospects. In order to
cater different customers within the environment, all ends of the lifestyle need to be considered.
Technological
Customer preferences change in time. In order to meet them, Technological advancement and new
equipment helps create new brand image and products (SAR, 2016). Competitive advantage can be
increased by maximizing on the market, and amplify profit by implementing innovative and
inexpensive technology (Mckeown, M. 2012). Technology can be used in the external environment
to introduce efficiency and operational excellence in the industry and consumers. The Players in
coffee must address the issue by exploiting the experience. Advancements in IT like EPOS
(electronic point of sales) technology in order to keep up with customers fast pace lifestyle
(ComputerWeekly, 2016).
Legal
The legal standards for doing business and employment have been consistently met my Costa coffee.
With the introduction and alliance with various bodies such as Food Standard Agency and Rainforest
alliance. If any of the standards was to be breached, the company would have to pay high
consequences from the government as well as their brand image. Heath and Safety is also a legal
concern and a challenge for the industry that cannot be overlooked.
Ecological
Another important factor in the external environment is the Ecological driver. Due to the coffee
industry being a part of the Ecology It has to look towards its manufacturing process of the coffee
beans as well as supplies when they produce. A key role in responsibility for the ecology is to make
sure their supply chain and the preparation and retailing of products and services is in par with their
treatment of environment when handling the forestry. The Take away cups and boxes are all
recyclable as well. (Hayman, 2016).

Porters 5 forces

Source:(http://www.comindwork.com/weekly/2015-08-03/productivity/five-forces-analysis-porter)

1) The Threat of new entrants

There is high level of response from the competitors in this established industry. Hence, there
is a relatively medium threat of new entrants for the coffee industry in the UK This could allow more
companies to grow further in many areas (Warner, A. 2010).

2) The Bargaining power of Suppliers

The profitability of a company can be highly affected by the behavior of its suppliers, hence in
the long run having control over your supplies maybe beneficial (Olsen, E. ,2016). For example, The
Suppliers and Businesses can arrange vertical integration or long-term supply. It appears that the
suppliers have a relatively low bargaining power due the sheer volume of coffee growing
communities around the world and the beans being traded in such high scales. Businesses may hold
on to particular suppliers, but they have easy option of switching to someone else in their own
consent. As the degree of differentiation in their products depends from supplier to supplier, the
possibilities of vertical integration is significantly compromised. The coffee farmer's rights and
regulations are protected by various alliances and NGOs such as Fairtrade and Rainforest Alliance
(Marketingmagazine.co.uk 2016). The relation between the company and supplier is key r, and will
get a well-received preferential treatment giving them the upper hand.
3) The Bargaining power of Buyers
The industrys competitive arrangements towards consumers might be risky towards the
buyers, but could also prove beneficial. The sheer volume of consumers in the coffee market means
that businesses need to ensure good relations and maintain PR as well as innovate in order to gain
some bargaining power back. Also in terms of proving a point, cost and quality are drivers for the
Industrys success (Holloway, C. 1986). Vertical integration is a high possibility due to high amount
of option s in the market. Product standardization have strict standards, well trained and protected,
whilst being unique to their own brand.
4) The threat of product substitution
The elasticity of demand for some of its particular products and services determines the
intensity of substitutability. Coffee comes second to oil as the highest traded product in the world.
Because of the demand many close competitors and substitutions such as Tea and other Beverages
pose a great threat. Increasing popularity of caffeine based energy drinks, persistent summary about
intimidating affect of caffeine concerning ones health may pose a risk to the coffee industry.

5) Rivalry amongst existing competitors

Porter describes a force, Jockeying for position. This phenomenon might be visible in
various ways such as price competition, marketing, innovation etc. (Porter, M.E ,1985). In the UK
the coffee industry has had its paces at this point, so the threats of rivalry are high with high barriers
of entry. With Costa being the biggest chain in the UK, there are massive Numbers of businesses
contending in concentrated sectors. Some examples include Starbucks, Cafe Nero, Harris and Hoole
and other trending Artisan coffee shops. Therefore, Differentiation amongst them can be seen from
level of innovation and the model of strategy in marketting.

Internal Analysis of Costa Coffee

According to Porter (1985), Resource Based View represents various internal activities of a firm and
utilization of all their available resources to add value to their core competencies. Internal analysis is
process of evaluating an organisations strengths and weaknesses; also highlighting all the
competitive advantage of the organization (NUK, 2014). An internal analysis is vital, because it helps
the organise the key values of the resources and maintain them in order to achieve their goals via its
characteristics and culture.

Resource Based View

Various Tangible and Intangible resources bundled by the organization is utilized and applicate in
order to gain competitive advantage. Resource Based View analyzes these resources in terms of
Value, Uniqueness and Substitutability. The model is used to transform short-run competitive
advantage into a sustained competitive advantage (Penrose, 2013).
Valuable
Value of product in Costas coffee is created by roasting the coffee themselves for all their
well-known beverages. Every cup of coffee costa makes is made from freshly ground beans,
prepared consistent and high quality standards, ensuring excellent flavours and aromas. Costa is seen
as a world class standard delivering business with a unique customer value and marketing strategy.
Costa Coffee have proved to consistently used the right tools to compete for value in the market.
Their Business model of retaining Talent as well as their unique beverages has been successful
(Mckeown, M. 2012).
Rarity
Costa has created a unique production line and marketing approach, owning their own
roastery plant in Lambeth for their own production of coffee beans. Manually slow roasting their
coffee blends is the first stage of preparing their signature blend Mocha Italia. The trained Baristas
in stores ensures perfectly made beverages to the company standards and maintain their customer
base. All these features make them unique and rare in operation from their closest rivals in the UK
and Internationally.
Inimitable
Costa coffee UK attracts 4 million customers per week internationally and unmatched in
terms of market share (Costa.co.uk, 2016). Costa gives out their products in a very unique way from
the market. For example, their coffee is hand picked from one of 70 countries. They blend their two

types of coffee beans i.e. Arabica and Robusta, in a very unique way. This secret has been saved in
the company vault for decades that no one has been able to imitate. All of the beans are 100%
rainforest Alliance and have a distinct taste that draws the customers. The competitors do not possess
such standards as they have a different model and approach.
Non-substitutable
Costa have proved themselves by being unique in various ways. Their unique coffee blend
that is inimitable and their excellent atmosphere for their customers have provided them a unique fan
following of customers and a top spot in the industry. They have a fairly medium level of
substitutability when it comes to their core products because of the many number of competitors.
However, The loyalty point system for Costa benefits customers in various ways. They have been
smart to provide various other products to the market besides of coffee such as Tea, Juices, caffeine
substitutes and Also Hot Food and Pastries.

Internal audit
Internal Audit is a key model to ensure independent assurance that a businesses risk management
and operational excellence are effective and efficient (David, F.R ,2012). It helps an organisation
assess and encourage the effectiveness of risk management, control and governance process in a
systematic and a disciplined way. Also a daily operation standards are audited effectively in this
model.

SWOT Analysis

Strengths (internal)

High reputation and Brand name for

Quality and Variety of products
Increasing development in a global
level
Ability to change and contour to the
needs of the market
Efficient Business Intelligence
throughout the organization
High focus on customer care
Stable Financial Status throughout
operation
Fast growing application of
Technology

Opportunities
(external)

Potential takeover opportunities

and strategic alliances in Europe
and China
Wide opportunity to expand over
American and Asian Continents.
Competition to expand to
Specialty cofee market
Include Technological advances
in Flagship stores and Express
machines
Exploit market share possessed
by the company
Further expansion
internationally and locally

Weaknesses (internal)

Weak control over its own

empire, despite its advantage in
IT
Unable to reach particular
markets internationally
Lack of flexibility compared to
competitors
Inconsistent training amongst
staf
Unreliable cash inflow for future
product development

Threats
(external)

High competition from local

business, individual specialty
cofee shops and other chains
Highly exposed to political
issues in the international
market
Changing economy and price
rates
A price war in the industry to
decrease operational costs
Constant change in IT functions
and its advancements
Rising Prices of Raw Materials

Strength
Costa Coffee are infamous and reputed for their strong brand name and visibility. They have been
voted UKs favorite coffee shop for over 5 years. They have maintained a high level of growth not
just in their home nation but globally (Whitbread.co.uk, 2016). The coffee beans in Costa are 100%
Rainforest Alliance certified with its unique blend Mocha Italia, while the milk in Costa is
obtained from the best farms in the South West England (Costa,2012). The Baristas in Costa are
trained from professionals in academies across the world. They have partnered with various BI
specialist companies in order to better the IT functions within the company (Bulletin, 2016). The use
of 1.5L plastic pouches to transport milk helps to reduce plastic waste and maximize the refrigeration
space. It focuses on small details like recycling the store waste and designing the recyclable cups and
paper takeout bags (Hayman, 2016).

Weakness
There is a cost for being stretched to nearly 4000 locations in 35 countries, so it is existing in a
chaotic way in terms of having control over the empire. Certain markets in UK are being unable to
reached by the business due to various reasons (Penrose, 2013). Flexibility has also been
compromised for similar reason, as they are unable to flex their 5000 stores without many problems
being faced. Moreover, their target customers are finding It difficult to deal with the increasing price
of beverages and the products, in comparison to local businesses.

Opportunities
The opportunities for Costa are obvious. Their market is very reliable and also has high
potential to expand massively in short period of time. For example; Markets such as South America
and North America is a great opportunity for them to explore and get a taste of how the consumers
might react to their product. The technological advances in coffee making and IT can be utilized and
provoked to their advantage to get ahead of the competition.

Threats
A noticeable threat in UK is a history of tea culture that Costa should take into account and use as an
advantage. They currently sell high quality teas in various flagship stores, which can be expanded
further (CriddleAmbrose, 2016). The price of coffee beans and dairy products rising has been
causing increase in retail prices as well. With the introduction of Brexit into the equation, a lot of
changes will be made into the Political and Economical factors of the environment. Also the local
coffee shops in the market are posing high competition for the industry as they introduce higher
quality coffee and service with a buzzing pace.

Strategy Issues
Conclusion

Identified

from

the

Audit

and

Costa Coffee have accomplished a worldwide brand image and stretched far beyond nation borders
quickly. Their careful use of international growth strategy such as transitional strategy and with
various marketing techniques that include differing seasonal promotions, social media adverts and
Costa Book Awards have given them a leading edge in the competition. The Executives of the
business have implemented strategies formulated in accordance to Specific functional and
operational decisions. The Business is growing and improving their brand image in a fast pace as
they have a very high rivalry opposition whilst protecting their territory and competencies. The
organization has to be fully aware to be able to exploit their competitive advantage, such as their
unique products and services in order to make sure the external factors dont affect the internal
operations (Penrose, 2013). The company should continue expanding and capitalizing their brand
image implementing differentiation strategy. For the business model of Costa in comparison to the
SWOT analysis see appendix 2. Differentiation strategy as defined by Johnson et al (2014) is the
process of developing a product that offers unique attributes, which are valued by the customers and
are perceived to be better than other products of the competition. Doing so would urge the R&D
team to inspire and emphasise innovation, and also benefit to differentiate them clearly forms the
opposing competitors.
A major issue recognized during the whole audit was the compelling growing competitions
from Artisan coffee shops and the emerging drivers from Brexit and Economic factors. These are
threats that may allow a shift in the paradigm of their Strategy and also their Business model.

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Appendix 1: Business Strategy Level

Source:http://www.bordbiavantage.ie/marketingbusiness/marketing/competitivestrategy/pages/devel
opingacompetitivestrategy.aspx

Appendix 2: Strategy Evaluation

Source : https://www.whitbread.co.uk/about-us/our-strategy/business-models.html
Strategy Option

Sustainability

Penetrating
global
markets with high brand
awareness and innovation.
International
growth
strategy
Mass refurbishment of
high end stores and new
stores
opening
for
expansion
High
focus
on
competencies
and
Development of human
resources

Acceptability

Feasibility