Strategic Management

Business Report
Pratik Shrestha (21240206),

UNIVERSITY OF WEST LONDON

Submitted to :

Table of Contents
Executive Summary..........................................................................3
Introduction..................................................................................... 3
Vision, Mission & Values....................................................................3
External Analysis of Costa.................................................................4
Pestle Analysis................................................................................................................. 4
Porters 5 forces................................................................................................................ 5
1) The Threat of new entrants...................................................................................... 5
2) The Bargaining power of Suppliers..........................................................................5
3) The Bargaining power of Buyers.............................................................................. 6
4) The threat of product substitution........................................................................... 6
5) Rivalry amongst existing competitors......................................................................6

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

Value chain analysis......................................................................................................... 7
Valuable....................................................................................................................... 7
Rarity........................................................................................................................... 7
Inimitable..................................................................................................................... 7
Non-substitutable......................................................................................................... 8
Internal audit................................................................................................................... 8

SWOT Analysis.................................................................................. 8
Strength........................................................................................................................... 9
Weakness......................................................................................................................... 9
Opportunities................................................................................................................... 9
Threats............................................................................................................................. 9

Strategy Formulation........................................................................9
Corporate Strategy level................................................................................................ 10
Business Strategy level.................................................................................................. 10
Functional Strategy Level............................................................................................... 11

Strategic Implementation................................................................11
Strategy Evaluation........................................................................11
Recommendations..........................................................................13
Conclusion...................................................................................... 13
References.....................................................................................13

Executive Summary

Introduction
This business report discusses the whole strategic management process for
Costa, including an analysis of the internal and external environment of the
company, a strategy formulation and evaluation, whilst examining the vision,
mission and values of the business. This has developed an understanding of
how to implement differing strategic approaches for management issues in a
critical manner alongside positive decisions and teamwork skills.
LO.1: have developed their knowledge of relevant strategic management
frameworks to successfully carry out external analysis and apply this knowledge
in a wide variety of contexts.
LO.2: have developed their knowledge of relevant strategic management
frameworks to successfully address internal analysis.
LO.3: be able to analyse and evaluate case study information in a critical and
informed way.
LO.4: be able to identify key issues, evaluate alternatives and make conclusions
based on thorough analysis
LO.5: be adept at accessing, selecting and utilising a variety of business
information sources
LO.6: be able to formulate business reports and make appropriate strategy recommendations (if
required)

Vision, Mission & Values

External Analysis of Costa

Pestle Analysis
A concept of external analysis of the company would be PESTLE, a mnemonic,
looking towards the political, economic, social, technological, environmental and
legal aspects of the industry in which Costa operates within, considering the
environment surrounding it. An aspect of the political and legal side to the UK
industry would be that the coffee beans are grown in developing countries, and
so there have been debates surrounding child labour, working conditions and
labouring costs in general. There also taxes and tariffs to be considered, having
a great impact upon the coffee industries political and legal environment,
development and performance. An aspect to the economic macro-environment
to the industry is the 2008 economic recession, which was a significant
challenge as peoples disposable income was less readily accessible. The
economy began to recover in 2010, but with this, the government raised VAT to
increase revenue, and inflation was also high, leading to the high price of
products and ingredients. For the social part of the PESTLE analysis, lifestyle is
key, generally in modern day UK there has been a rise in the middle class,
following the 2008 recession which has led to upper middleclass households,
therefore companies within the coffee industry must consider their strategy, so
as to address the potential for the consumer market, without alienating other
areas of the market. It is this area of the market that will take the time to sit
down and relax, so coffee shops must maximise of the experience of the coffee
consumer. On the other end of the scale, lifestyle is also much faster paced than
it once was, and so the industry can apply different areas within strategies to
cater to this market express counters and takeaway options. Similar to social,
technology plays a large part as a section to this external analysis, coffee
players have to gain competitive advantage, maximising on this market,
implementing new and cheaper technology that amplifies profits. The latest
technology introduces cheaper and better coffee to the industry but also to the
coffee consumer at home with the machines becoming more accessible to them,
so the coffee companies must address their strategies accordingly. Also, tying in
with the fast-paced lifestyle customers, companies have turned to EPOS
(electronic point of sales) technology which increases efficiency for companies
and their customers. Finally, the environment is considered within the analysis,
and due to the rise of environmental awareness over the previous 5 years, the
coffee industry have to look towards their manufacturing process of the coffee
they produce, their treatment of employees regarding pay and working
conditions, the procedure of supply chain and the preparation and retailing of
their products and services.

Porters 5 forces
1) The Threat of new entrants
The threat of new entrants for The coffee industry in the UK are relatively low

meaning that the industry has already established itself on to the coffee market
into the UK and most parts of the world. Hence, the response will be lower from
the new comers and the competitors. This in fact is going to open more
opportunities for the company.
There might be a lot of factors that might still create barriers for the company
such as:
Economies of scale: The industry has high economies to scale due to the import
of coffee and it's availability to them.
Product Differentiation: There is good brand awareness for its products and has
been established to be differentiated from its competitors in a lot of standards.
This factor might require the industry to spend time and investment on
promoting specific products and brands.
Capital Requirements: High Capital requirements in terms of Labor and Rent
and lease depending on the location. Otherwise, low capital requirements.
Switching costs: Substantially low cost threats are incurred as long-term history
of similar prices and also suppliers loyalty towards the company. Therefore
newcomer's price might not be a very high factor.
Cost advantages independent of scale: Might be a factor that could threat the
company's cost advantage as. The brand is known to have higher prices on its
products to its competitors and many of the new comers might take and
advantage to that.

2) The Bargaining power of Suppliers

The suppliers behaviors and relativity can highly affect the company's
profitability. Therefore it is very beneficial in the long run to have the firm
control it's supplies by for example, Vertical integration or Long-term supply
arrangements from their suppliers. The industry has an immensely wide range
of suppliers for its different needs and due to the large number of suppliers of
coffee into the market, It might seem that the suppliers have a low bargaining
power. But since Costa Coffee relies on particularly approved suppliers from the
Rainforest Alliance, research shows only 1% of the total worlds coffee beans is
suitable for Costa's blend of coffee. Hence, opportunities for switching suppliers
are limited.
Even though they might be tied up to a particular supplier they have
opportunity to switch between others, as the degree of substitutability between
the various products of various suppliers is very high. As well as having very low
amount of differentiation in their products.
There are though low possibilities of vertical integration as there are certain
alliances, unions and NPO's that prevent from this and protect the coffee
farmer's rights and regulations.
But the amount and extent at which the industry imports their products the
buyer in this situation is very important or a key customer to the supplier.
Therefore, a very low threat of substitution and they have a well receiver
preferential treatment.

3) The Bargaining power of Buyers

There are some competitive actions by the buyers that might be a potential
threat towards the company, but also there might be some specific
arrangements with them that can prove beneficial. There are a lot of factors
that determines the bargaining power of the buyers. For The industry the sheer
size of the buyers and customers are very high and also concentrated to some
extent. They have proven to ensure good relations with their customers
, And buyers. Plus also have proven themselves to the buyer of the purchases in
terms of both cost and quality.
There is a very low threat for the industry in terms of substitutability in terms of
agrees in product standardization. Their Products have strict standard, which is
highly guarded, followed by every team members and also unique to their own
brand.
But this also leads to a high possibility of vertical integration by the buyers
interns of buying franchises, which has medium levels of threat to the company.
4) The threat of product substitution
There is high amount of existence of close substitutes for the industry, which
determines its elasticity of demand for some of its particular products and
services. The highest amount of threat is caused by the fact that coffee is the
second highest traded community in the world. And since there is such high
demand for it, even though costa maybe one of the leaders in what it does and
supplies. There are a lot of threats of close competitors that might steal the
company's thunder. For this reason the company has seeked to establish clearly
their products and services that clearly differentiates itself ignorer to create
customer preference and loyalty making their products less price sensitive.
These factors help to lessen the threat that might be affecting other factors of
the company. For example the rising market of energy drinks over coffee and
the constant news about threatening affect of caffeine towards ones health.
These factors might also oppose a threat to a coffee selling company for other
substitutes such as tea or any other drink.
But where just coffee is bared in mind. Costa has developed it's own unique
blend of Arabica and Robusta coffee beans which is unique to the industry and
has earned them their name and spot in the industry for generations and a fan
following unique to any other coffee shop.
5) Rivalry amongst existing competitors
There is a term assigned by porter for this very force, Jockeying for position. This
very phenomenon might take a lot of forms such as price competition,
marketing, innovation etc. The coffee industry has been quite mature at this
point so in terms of existing competition the threats are pretty high with
massive coffee chains competing for the top spot in concentrated sectors. The
closest ones to compete with Costa Coffee in the UK are Starbucks, Cafe Nero,
Harris and Hoole and with the trending Artisan coffee's posing a high threat as
well. Therefore due to the high level of competition within the industry it usually

boils down to innovation in their product and services and also their marketing
strategies. One of the factors that give costa coffee its competitive advantage
its increasing rate of growth and a high degree of differentiation. These
information helps the company to decide important actions against competition
as well as with themselves and decide how they going to react.

Internal Analysis of Costa

Value chain analysis

Valuable
Costa Coffee produces value by roasting their well-known beverages. The cup of
costa is made from freshly ground beans, they keep their product consistent by
ensuring excellent flavours and aroma. This is a unique customer value and
seen as a world class standard. This shows costas marketing strategy to be
unique in the market. It guarantees customers a taste of exceptional product
and service. No other companies in the same market has the right tools to
compete for value with Costa. This has proven to be one of the ground breaking
service Costa provides to ensure the value of the company in the growing
market.
Rarity
Unique production process-Costa Coffee has created a unique marketing
strategy, having their own roastery plant in Lambeth for their own production of
coffee beans. The first stage of preparing Mocha Italia includes manually slow
roasting their coffee blends. Second step would ensure that they grind the
ground beans to maintain product quality, flavour and aroma that attracts the
customers as it is being done and served hot. The final process includes the use
of espresso machine in tune with technology to produce to produce a consistent
blend and perfect espresso. Because of the old fashion technique combined with
modern technology ferrai of grinders the mazzar to make the perfect cup, Costa
coffee has created a unique position in the UK market as a company. The
process stated has been so popular that it is approved in other countries as well.
Inimitable
Costa Coffee is an internationally trusted brand where they attract 4 million
customers per week. This in itself is very hard for other companies to compete
and imitate in terms of customer sales and profit revenue. Costa as a company
provide their product like no other competitors out in the market. For example
their coffee is typically grown in one of 70 countries in either side of the equator.
This region is known as Bean Belt. There are various different coffees, however
only two are grown commercially in our farms. They are known as coffee Arabica
and coffee Robusta. All of the beans are 100% rainforest Alliance. In comparison

companies that are in the same market sector i.e. Star bucks and caf Nero do
not possess such standards in terms of imitating the rainforest alliance and
growing coffee in either side of equators.
Non-substitutable
Costa Coffee provides excellent atmosphere for their customers. Some of the
points are as follows: The lighting quality in the caf enable customers to read
with their eyes comfortably. They provide Wi-Fi service where they welcome
customers to connect their electronic devices such as laptop, phones and iPad
etc. The company provides air conditioning during winter and summer to
guarantee the right temperature to enjoy their coffee. The loyalty point system
benefits customers in various ways. For every 1 they spend, they receive 5
points to spend on their beverage on their next visit. In comparison companies
although companies such as Starbucks and Caf Nero provide services of their
own it cant be substituted from Costa Coffee as they have proved themselves
deemed worthy by providing unique product and services.

Internal audit
The importance of internal audit is to ensure that its independent assurance
that an organisations risk management governance and internal control
processes are operating effectively. It helps an organisation achieve its goals
and objectives by introducing systematic disciplined approach to assess and
promote the effectiveness of risk management, control and governance process.
internal Audit-Costa coffee

Costa check-brand excellence-responsible for maintaining brand standardcustomer service and brand brand service
CMI checks quarterly-health and safety checks, cleanliness and overall
standards
Win card-finance stability reaching cooperate goals, over all performance for
each store
Customer heart beat sheet-connecting company to customers from various
feed back methods
Evaluation of the team-NPS scores, summarises all internak audits

SWOT Analysis
Strength
Costa Coffee in UK is famous for its excellent brand name and brand visibility. It got a good
reputation since it stands for the excellent, luxurious and perfect quality. The coffee beans
in Costa are 100% Rainforest Alliance certified, while the milk in Costa is the best in the
South West England. Moreover, the talented team in Costa always offer the greatest
service and customers treat Costa as the most comfortable and convenient place to relax
and meet friends. Besides, Costa also cares about the environment. It is the only coffee
shop in the UK than uses 1.5L plastic pouches to transport milk, which helps to reduce
waste plastic, waste mill and maximise the refrigeration space. It focused on small details
like recycling the store waste and designing the recyclable cups.

Weakness
On the other hand, Costa is not as popular as it only stretched to nearly 5000 destinations
in 35 countries, so it is presented in a limited number of countries and there is very little
number of stores. Even some stores locate in airport, which means people in these
countries cannot experience Costa every day. Moreover, their target customers are youth in
the middle and higher income group, so that the price are not acceptable for all people in
UK, especially compared to those local small coffee shops.

Opportunities
The opportunities for Costa are obvious. Costa has got a reliable market, so it is the time to
broaden the potential market. For example, Costa could launch out some cheap coffee to
attract people of lower class but still maintain the quality. Furthermore, it can expand to
more cities, more countries or set up more stores in one popular city to raise the brand
image and attract more customers. Besides, it cannot deny that coffee culture is now
popular in the world that Costa did help a lot for this.

Threats
It should notice that some threats do exist. The culture of tea in UK has a long history that
Costa should not compete with it but take advantage of it to launch more kinds of tea in
store. Secondly, if the price of coffee beans and dairy products will rise, then the price for
each coffee product will also change, so there should be less customer are able to afford
one coffee. Costa should not pay attention to its biggest competitor Starbucks but also
other emerging coffee shop in local city, which will lead to a price and quality competition.

Strategy Formulation
Formulating a strategy accounts to the third step of the Strategic Process. A
factor, which plays a vital role in this step, is strategic planning. To plan ahead
helps the company decide its future co-operate objectives and be effective in
reaching then. The strategic leaders or Entrepreneurs are responsible for
providing direction in the form of mission and vision, and also formulate and
implement corporate strategies. After we have analyzed the external and
internal environments of the business, various factors are considered for the
strategy formulation. The three available approaches are further discussed as
follows.

Corporate Strategy level

Corporate strategy deals with directing a company towards its organizational
goals and its overall operations decided by the top-level management. Costa
coffee solely focuses on the food and beverages industry; hence the company is
considered as a Single business organization. These helps the company focus
and develop on its core business practices, also this strategy is proving to help
costa move forwards in its strategic direction i.e. moving forward. The intention
of that is to expand in the available markets and increase revenue and
customers. The possible growth strategies to choose from are international,
concentration, diversification and horizontal and vertical integration. After
carefully analyzing the internal and external environments its clearly seen that
Costa Coffees strategic direction is being pushed forward using
Internationalization. Under that they are using a transitional strategy where
Costa relies on the same brand name and the same core menu items around the
world but makes some concessions to local tastes too. For example Costa coffee
in UAE sever cortado using a different recipe allocated to the coffee standards of
UAE.

Business Strategy level

The business level strategy looks in the how the company operates and how
they are being compared in similar markets. Referring with Porters Generic
Competitive Strategies, Business strategic factors are based on what level the
company is competing in. They can be further explained by the figure below.

Source:
http://www.bordbiavantage.ie/marketingbusiness/marketing/competitivestrategy
/pages/developingacompetitivestrategy.aspx
Costa coffee is following the differentiation strategy, as costa invests highly on
making itself look apart from many of its competitors. For example, they invest
highly in creating new blends and origins of coffee and new products that differ
them from its competitors. Adding to that can also be Costa Express, which is a
unique product in terms of competency and high quality. They have considered
various factors such as market, cost, competitive and government driversgeographic advantages.

Functional Strategy Level

This level of strategy is concerned with how daily management and operational
functions are operated within the company. A company might have different
strategy depending on its size and their operations. Costa coffee seems to have
a wide variety of strategies implemented as they imply various roles that has
been decentralized for various functions. They also have various incentive
methods to suit all management and functional leves such as bonuses,
recognitions and feel good points for their baristas.

Strategic Implementation
Specific functional and operational decisions are used to implement strategies
formulated by the strategic leader. For Costa coffee they use a mixture of
Offensive and Defensive moves to attempt various objective goals. They are
moving forward and improving brand image aggressively as they have a very
tight competition whilst protecting their turf and competencies.

Strategy Evaluation
After careful formulation and implementation of the strategy, the next step is to
evaluate the progress and effects upon the companys performance. As well as
weather it was successful to reach the strategic objectives and exploit a
competitive advantage. The business model of Costa coffee can bee seen in the
image below,

Source : https://www.whitbread.co.uk/about-us/our-strategy/businessmodels.html
It can be clearly seen that the SWOT analysis alongside the external and
internal environment comes in par with the business model that they have
chosen and also with the three levels of strategic formulation discussed earlier.
Due to their strong belief in sticking to what they are good at they have
exceeded in maintaining and promoting their brand name as UKs no.1 favorite
coffee shop for years now. They have expanded globally in a fast pace in 3
continents over the decade. There are three success criteria used to evaluate
strategies, which are sustainability, acceptability and feasibility.
Strategy Option
Sustainabili
Acceptability
Feasibility
ty
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

Recommendations
The image below shows that they have achieved
to expand marvelously in the market during a
short period of time thru international growth
strategy such as transitional strategy and also
they have increased their brand image as well
with various marketing techniques that include
various seasonal promotions, social media adverts
and Barista of the year.

Costa coffee should continue to reach

international grounds and meeting their demands as well as implement
differentiation strategy, which will help to capitalize their brand image.
Differentiation strategy is the development of a product that offers unique
attributes, which are valued by the customers and are perceived to be better

than other products of the competition (Johnson et al, 2014). Doing so would
urge the T&D team to inspire and emphasize innovation. And also benefit to
differentiate them clearly forms the opposing competitors.

Conclusion
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