Swot, Porter and Pestle analysis of the coffee industry...

SWOT, Porter and PESTLE are various methods a organization may use to access or predict market conditions. SWOT refers to the internal and external strategies. It aims to provide a basis for decision making and problem solving. It can also be used integrated into the PESTLE analysis.  Porter is used to help organizations understand its competitive strength in current markets and the strength of a position they are considering moving into. PESTLE assess the eternal factors faced by businesses (Political, Environmental, Social, Technological, Legal and Economical). It is used to predict future perspectives.

The coffee industry is said to be highly competitive. There is competition amongst the branded ones and the local ones. Lets conduct a swot analysis for starbuck. It will look assess the strengths, weaknesses, opportunities and threats towards the organization.

Strengths: 1) It has stable financial records. i.e it has a profitability of 14%. People are keen on investing as                       they get a return of 24.54%.
                2) It ranks 1st in the list of most valuable coffee brands. It is worth $4billion.

Weaknesses: 1) It has external suppliers. Supply may vary from time to time thus causing fluctuations in                                  costs.
                     2) It has been shamed by the public for using tax avoidance policies. It had over $400 million                            of sales in the UK alone but had not paid any taxes.

Opportunities: 1) They have the opportunity to penetrate new markets such as India's and China's as both                               countries are experiencing an increase in demand for coffee.
                       2) They can diversify their products. They can also start selling wines, beer an juices.

Threats: 1) Increased competition from local specialized cafe is becoming a bigger threat to Starbucks as                        they progress.
             2) Supply disruptions may occur due to weather or political factors.

A diagram of a SWOT analysis done on Starbucks 

Although the SWOT analysis helps organizations understand its business better or helps in deterring threats or even helps organizations to capitalize on its opportunities it does not provide the solution to the problems. It also does not prioritize the issues the organization faces. It provides many ideas but does not tell organization on how to implement them.

The Porter's 5 forces model looks to assess the supplier power, buyer power, competitive rivalry, threats of substitution and threats of new entrants.

Porter's 5 forces model

In the coffee industry the supplier power is considerably high. This is because it is very difficult to find high quality coffee beans and are also very highly demanded. The supplier is able to set a price. Advancements in technology is causing the use of more coffee beans thus increasing the amount of sales made by the suppliers due to the increased demand resulting in increased power.

The power of the purchaser is relatively low. Big brands like Costa Coffee have fixed prices i.e. they are non negotiable. How ever substitutes do exist. Threats of substitutes would include cheaper brands of coffee such as McCafe, whose prices are relatively lower than those of Costas. Other cheaper substitutes exist such as tea, juices and even soft drinks. Local coffee shops are also cheaper than the branded ones.

There is moderate threat from new entrants. The coffee industry is already very saturated thus has quite low profitability. Also existing food companies diversify to penetrate coffee markets. For example Mcdonalds launching McCafe. 

There is much competition within the industry itself i.e Nero vs Starbucks vs Mcdonalds vs Costa vs Local shops. Currently Costa is the market leader in the UK and the big brands in total have 54% of the market share. 

Although Porters 5 forces analysis shows that the coffee industry is quite risky and has low profitability, it does not take into account the rapidly changing economic or market conditions. It does not consider non market factors such as consumer tastes and recession. The flaw is that the model is based purely on the idea of competition. A challenge to this theory would be the game theory, which considers various variables concerning price and leadership. 

Lets look at what the Pestle analysis suggests about the coffee industry. The main purpose of Pestle analysis is to assess the external factors that can affect the business. Factors such as political, environmental, social, technological, legal and economical. 

Details of what each factor assess

The political factors that the coffee industry faces are that high standards must be maintained in terms of health and safety, imported coffee beans could have restrictions, duties or quotas and the very common fear of terrorism. There is no Starbucks in Conga, one of the major factors would be the dangerous conditions as they are in the midst of a civil war.

Environmental factors are given very serious importance in the UK coffee industry. There are strict laws on CO2 emissions. Coffee houses are expected to fulfill their corporate social responsibilities. There are Legal matters to be aware of such as minimum wage laws, regulations and the very basic: licensing. 

Technological factors have major impacts on the coffee industry. The increase in vending machines is negatively impacting the sales of coffee houses. However technology is also allowing coffee houses to become faster with their service, to be more efficient and less wasteful. 

There is a big coffee culture in places such as the UK and US. Coffee is consumed highly. More importantly people go to coffee houses frequently to socialize, it become part of the culture. Economic factors can both adversely and positively affect the coffee industry. UK is pulling out of a recession, consumers are starting to spend more thus increase in sales due to positive economic factors. Coffee sales in the UK are expected to rise to 8 billion by 2017. Interest rates are currently low at 0.5% but may rise in 2015 thus resulting in more costs for the coffee businesses and increase in prices for the consumers. 

In my opinion, integrating more than one strategy provides a clearer picture. Porter only assess the competitive forces but Pestle assess the external forces that are not necessarily associated with competition. Using them both together could create a clearer picture for organizations. However none of them actually provide solutions for the problems they state. Take care, see you next time.