Costa Coffee - the Fastest Growing Coffee Shop in the UK - Case Study Example

Managing Capability of Costa Coffee Table of Contents 1.0Introduction 2 1.1 Aims and Objectives of the Project Report 2 2.0 Company Profile 3 3.0 Importance of Capabilities and Their Contribution to the Competitive Advantage 4 4.0 Organisation’s Resources and Capabilities 4 5.0 Evaluating Strategic Capability 5 5.1 Value Chain analysis 7 5.2 SWOT Analysis 12 5.3 Balance Scorecard 13 5.4 Benchmarking 14 5.5 Ratio Analysis 14 6.0 Contribution of Managers to the Development of Capabilities Management 20 7.0 Conclusion 22 References 23 Bibliography 27 1.0 Introduction In this competitive global world, it is difficult for organisations to survive and retain their position. The organisations need to develop innovative strategies to gain competitive advantage. Proper and effective utilisation of the resources and the capabilities can be considered as an essential factor to develop the competitive position. Hence, it has been decided to throw light on proper management of the resources and capabilities of an organisation in this paper. For building up a better understanding, an organisation has been chosen and that is Costa Coffee. The entire discussion of this paper will be conducted with respect to this company. 1.1 Aims and Objectives of the Project Report The primary aim of this report is to explain and assess the importance of capabilities and their contribution to the competitive advantage of the organisation. It has also been aimed that the paper will contain the organisation’s resources and capabilities. By using the variety of tools and frameworks strategic capability of Costa Coffee is to be evaluated. Lastly, it will discuss the contributions of managers towards the development and management of capabilities of the organisation. 2.0 Company Profile Costa Coffee is recognised as a coffee house that is situated in the United Kingdom. It was established in the year 1971 by two Italian brothers named Sergio and Bruno Costa. It started out as a wholesale operation with an aim to supply roasted coffee to Italian coffee shops and the caterers (Roz, 2011). Costa Coffee is the first UK coffee shop chain to source the beans from the Rainforest Alliance Certified farms. Costa Coffee follows a business plan in which they look to acquire all the coffee beans from certified sustainable places as early as possible in order to create a differential factor from their competing coffee shops. In 2010, Costa Coffee became the favourite coffee store in the UK. The store has a warm as well as welcoming ambiance along with great range of authentic coffee drinks. They have with them Ferrari of coffee related machines and they have among their employees the most well trained and passionate baristas. It is totally different from others coffee shops due to its uniqueness (COSTA, n.d). They are concerned about the nutritional value of the drink and are working hard to reduce the salt and fat content without effecting the quality and taste of the drink (COSTA, n.d). Costa CoffeeCoffee production in Costa RicaJuan Valdez drinks Costa Rican coffeeRoadchefMaroussi B.C.Costa Book AwardsWhitbreadCostaMoto HospitalityHudsons CoffeeList of coffee companiesCosta RicaCafé BrittWatford Gap servicesForum 28Orchard SquareSouthwaite servicesSeef MallWoolley Edge servicesMaidstone services Wetherby servicesAmerican International School – RiyadhRehab CityThe Mall SouthamptonJohn Greenwood (executive)List of restaurant chainsSevern View servicesStrensham servicesSt George's Shopping CentreEmersons GreenDelta CityGunwharf QuaysStafford servicesWalsall Art GalleryDandelion coffeeEurocup Basketball 2008–09CranleighBull Ring, BirminghamList of coffee beveragesDunkin' Donuts Costa Coffee is the UK’s largest and fastest growing coffee shop brand with 1100 coffee shops in the UK itself, 412 of which are franchises. It also has a substantial international presence with 442 branches in 25 international markets (Storz & Et. Al., 2009) 3.0 Importance of Capabilities and Their Contribution to the Competitive Advantage Capability is the identity of a firm as perceived by both the employees and the customers. It is a capability for a group of resources to integratively execute a stretch task. Resources and abilities of the organisation have a positive impact on the competitive advantage of the organisation. The capabilities help the firms to manage for the future plans by focussing on the needs and requirements of the customer as well as managing crisis and problems which arise in their working environment. Thus, it is seen that capability is one of the main source for competitive development of an organisation. It is the ability of Costa Coffee to perform better than its competitors by using a distinctive set of business attributes. The firm is said to have a competitive advantage over its competitors when a firm gains profits which is more than the average level for its industry. Capabilities as a cause of competitive advantage should not be too simple or too complex. Instead it should be grown quite fast with the aim that it ultimately leads to success (Kotelnikov, 2001). 4.0 Organisation’s Resources and Capabilities Resources can be described as the productive assets of the organisation i.e. tangible such as cash and plant, intangible such as technology, culture and also human such as skills, capacity for communication and collaboration and motivation. All these resources enable Costa to function efficiently, managing everything from Human Resources and Service Quality to Retail Development Management, Communications, Finance, Corporate Sales, Supply Chain and Marketing. At Costa stores, good resources are essential as it will help to make perfect coffee for the customers. Making a tasteful cup of coffee requires time, skill and perfection from the staff. That is the reason why the human resources of the stores of Costa Coffee are professionally trained in the art of making coffee by their experts. They have developed new coffee making machines which can produce best coffee using less energy. The coffee is grown through the Costa Foundation, the milk is produced by their herd of cows on British farms and the cup is produced with pulp with the aim to recycle it (COSTA, n.d). Capabilities are things that the firm can develop to fulfil all its requirements in the firm. They are improving their ability to consume energy, reducing the waste products to control pollution. The tangible resources, intangible resources and human resources of Costa Coffee have been identified along with their capabilities. 5.0 Evaluating Strategic Capability The resources and capabilities of Costa Coffee have already been evaluated. This part of the paper will analyse how the above factors have provided a sustainable competitive advantage to Costa Coffee. There are a number of ways by which it can be done. The approaches are SWOT Analysis, Value Chain analysis, Balance Scorecard, Benchmarking and Ratio Analysis of certain financial indicators with the industry as a whole. 5.1 Value Chain analysis (UK Education, 2011). The above exhibited diagram demonstrates the different activities of Porter’s Value Chain Model. The aim of the primary activities is to recommend the customer the importance of value that exceeds the cost of the activities, thus resulting in a profit margin. The primary value chain activities of Costa Coffee are as follows: Inbound Logistics: The process of receiving the coffee beans and their distribution to operation unit where delicious coffee can be brewed. Operations: The set of beans is roasted for a minimum time as needed in a Petroncini or Probat drum roaster (the best available, naturally). Proper roasting and aroma is extremely vital for a quality coffee. When the oils are still inside the bean and are prepared to be released, grinding is done in the Costa store and the roasting is stopped. The release of oils which create aroma can be experienced while sipping a cup of Costa coffee (Coffee Explorer, n.d). Outbound Logistics: Due to the nature of its business and to satisfy the demand of the customer, Costa Coffee uses takeaway packaging for different stuff of foods and drinks sold in its shop. It has been working with the UK Paper Cup Recycling to be free from waste. Marketing & Sales: In marketing and sales, Costa is able to sell cheaper coffee to regular customers and sell more expensive coffee to infrequent customers. In 2009/10, the Costa Foundation has developed schools within five communities where coffee is grown that are in Colombia, Costa Rica, Ethiopia, Guatemala and Uganda for its communication growth to provide help to the children for access to education. It was also aimed to provide facilities to all the people who make their coffee and the land they grow it on. Costa Coffee is trying to increase its market in metropolitan areas. The latest stores will have variety of design in comparison to the existing stores in order to attract more and more customers and to expand the business globally (Reynolds, 2010). Service: Services of Costa Coffee is extremely good. They have been ranked as best out of all the coffee chain. Coffee lovers prefer the Costa Flat White to the Starbucks Flat White. The overall services offered by them have been listed below in comparison to other coffee chain. Coffee Chains Average Costa Coffee Quality of hot drinks 8.2 8.8 Choice of cold drinks 8.0 8.5 Choice of food items 7.7 7.9 Time to queue here today 8.1 8.7 Speed of service here today 8.2 8.8 Friendliness of staff here today 8.5 9.0 Ambience / Atmosphere 8.2 8.8 Cleanliness of counter 8.4 9.0 Cleanliness of tables 8.3 9.0 Overall value for money 7.7 8.1 (Coffee Explorer, n.d.). These primary activities are supported by: The Infrastructure of the Firm: Costa Coffee is coffee houses based company in the United Kingdom by Sergio and Bruno an Italian brothers Costa in 1971, as a wholesale process supplying roasted coffee to caterers and expert Italian coffee shops. Human Resource Management: Costa is a primary player in a fast-moving and competitive industry of today. It is a great place for people who want to be a part of dynamic, world-class organisation, which is setting the way of thrilling challenges in the marketplace. The entire store is founded on the similar principles that the business must be successful with outstanding customer service, supportive family-like teams; an obsession for coffee and a pride in Costa. Every Line Manager in Costa, whether they're based in the Support Centre, Corporate Sales or Stores, works with a training framework designed for the role that work in, so whatever may be role of a person he or she is always encouraged to develop the skills. Depending on all these skills and experience Team Member, Assistant Manager or Store Manager is selected. Technology Development: In Costa Coffee the latest coffee machines – “Espresso” are used with sieve holders as well as completely automatic ones. The mills and roasting machines are also being checked all the time (coffee explorer, n.d.). Procurement: All the latest equipment is used for production of best coffee. Choco Sprint is the new packaging machine for chocolate products has also been used (Coffee Explorer, n.d.). The margin of profit of the firm depends on the activities performed by the human resources of organisation with the intention that the quantity that customer pays for the goods crosses the cost of the activities in the value chain. In these activities a firm has the chance to make superior value. The value chain can be reconfigured to gain the competitive advantage in an attempt to facilitate better differentiation or lower cost. The value chain model is a valuable study for defining a firm's core competencies and the activities by which it can follow competitive advantage. 5.2 SWOT Analysis Strengths The demand for coffee shops and quality of the product is enormous in the market. Customer base is also quite strong for coffee market. It has been seen that Costa coffee is one of the best of all other coffee chains nationwide and possess nutritious value as well. It is the UK's largest and fastest growing coffee shop brand embracing 1069 coffee shops in the UK, with 412 franchises. Costa Coffee has an international presence with 442 branches in 25 international markets. Weaknesses Coffee production has led to environmental problems for Costa Rica. Due to its seasonal business coffee prices do not remain same for the similar period. There is a lack of marketing expertise. Opportunities The demand for quality product at competitive price is increasing demand of Costa Coffee products. Market is led by weak competitor thus they can move into new attractive market segments. Threats New competitors may enter into the market and they can have innovative ideas and technology. There may be increase in trade barrier which affects marketing. Price war may also be created. 5.3 Balance Scorecard Balanced Scorecard is developed for strategic development and management systems, it helps the organisation to grow in the vision of success and get people working at the right time and on the right things. It actually means aligning variety of things to different people at the definite time in order to attain success. At one hand it means, measurement-based balanced scorecard is a performance measurement structure for grouping existing measures into categories, and displaying the procedures graphically, usually as a dashboard. The procedures in these systems are generally operational, not strategic and are used mainly to track program operations, production and service release (input, output, and process measures). At the other extreme, the balanced scorecard is a strong organisation-wide strategic planning, communications system, and management. In strategy-based scorecard systems, strategic and operational activities (outcomes, outputs, process and inputs) are one of vital components, and the procedures are used for better decision making at all levels in the organisation. A planning and management scorecard structure uses strategic and operational performance information to calculate and assess how well the organisation is performing with financial and customer outcome, operational effectiveness, and organisation capacity building (Rohm, 2008). 5.4 Benchmarking Benchmarking is the method of identifying, distributing, and using information for best practices and outcome. It is used as standard measurements in a service or industry for differentiation of it with other organisations in order to gain perspective on organisational performance. It helps to understand how one organisation can be compared with similar organisations, even if they are in a different business or have a different set of customers. Benchmarking has been divided into two distinct categories: Technical Benchmarking — It is performed by design staff to determine the abilities of products or services, especially in evaluation to the products or services of leading competitors. Competitive Benchmarking — It compares how an organisation is doing in respect to the leading competition, particularly with respect to vital significant attributes, functions, or values connected with the organisation’s products or services ( ASQ, 2004). 5.5 Ratio Analysis The ratio analysis has been performed based on the data collected from the consolidated Balance Sheet provided in the Annual Report of the company. 5.5.1 Liquidity Ratio Current Ratio = Total Current Assets/ Total Current Liabilities =164.4/358.0 =0.46 Interpretation Costa Coffee has £0.46 of Current Assets to meet £1.00 of its Current Liability Quick Ratio Quick Assets = Total Current Assets (minus) Inventory =164.4 - 17.0 =147.4 Quick Ratio = Total Quick Assets/ Total Current Liabilities =47.0/358.0 =0.131 Interpretation: Costa Coffee has £0.131 of Quick Assets to meet £1.00 of its Current Liability Debt to Equity Ratio Debt to Equity Ratio = Total Liabilities / Owners Equity or Net =1539.6/ 146.4 =10.516 Interpretation: Costa Coffee has £10.516 of Debt and only £1.00 in Equity to meet this obligation. 5.5.2 Efficiency Ratio Regular DSO (Days Sales Outstanding) Regular DSO = (Total Accounts Receivables/Total Credit Sales) x Number of Days in the period that is being analysed = (93.9/2.3) x 30 =1224.78 Interpretation: Costa Coffee takes approximately 48 days to convert its accounts receivables into cash. Compare this to their Terms of Net 30 days. This means at an average their customers take 18 days beyond terms to pay. Inventory Turnover Ratio Inventory Turnover Ratio = Net Sales / Inventory =213.5+830.3+138.0/17.0 = 69.51 Costa Coffee is able to rotate its inventory in sales 69.5 times in one fiscal year. Accounts Payables to Sales Ratio = [Accounts Payables / Net Sales] x 100 =0/143.5 x 100 = 0 There is no account payable for the company so it has not been calculated. 5.5.3 Profitability Ratio Return on Sales Return on Sales or Profit Margin = (Net Profit / Net Sales) x 100 = (160.0 /143.5) x 100 =111.49 Interpretation: Costa Coffee makes £0.71 on every £1.00 of Sale Return on Assets Return on Assets = (Net Profit / Total Assets) x 100 = (160.0 /2647.6) x 100 = 6.0432 Interpretation: Costa Coffee generates 6.043% return on the Assets that it employs in its operations. Return on Equity or Net Worth Return on Equity or Net Worth = (Net Profit / Net Worth or Owners Equity) x 100 = (160.0/146.4) x 100 = 109.28 Interpretation: Costa Coffee generates a 109.28 percent return on the capital invested by the owners of the company (Whitbread, 2010). 6.0 Contribution of Managers to the Development of Capabilities Management Role of managers is vital in Costa Coffee for developing and managing the capabilities in the organisation. Management is present in every type of organisation. The managers develop capabilities in the employees and perform certain basic functions for smooth running of the business. The main aim of management is to facilitate everyone in the firm working towards general goals which should satisfy the targets of the organisation completely as well as satisfy the customers. A manager is trying hard to attain all the objectives of an organisation ranging from promoting existing employees to modify the way of the industry and keep them in balance. There are several conflicting views but it is vital to be as practical as possible with all groups. There are various groups in the organisation that could be in contention such as consumers, employees, and government rules so the managers’ role is to keep them in balance (Oakes, 1997). Whitbread PLC has the ultimate decision-making authority in Costa Coffee management. Costa Coffee consists of the main board, Executive Committee and the Management Board. All of them take part in the managerial decision making of the firm. The managers of the firm must make use of all the time available to them as well as their co-workers. In the meantime they should be effective in completion of work. This means tasks must be completed within a reasonable time and with effectiveness. There are various functions of managers in the management. It is the manager’s job to assign responsibility of objectives to employees. It is also important to give employees the required right to complete responsibilities. A manager that can effectively assign tasks to others ensures that everyone has adequate things to do, work is reasonably spread among employees, and the whole thing gets done (Whitbread, 2010). 7.0 Conclusion It can be concluded that Costa Coffee is the fastest growing coffee shop in UK in comparison to other coffee chains. They are handling all the latest technologies and processes for their manufacturing unit. The resources and capabilities of the organisation also act as a vital source to gain competitive advantage of the organisation. This coffee shop chain selected the Torex system to gain control over its finances such as calculating franchise royalties and increasing purchase orders. These are the major tasks for a company with different outlets. By minimising the time spent on these activities, Costa Coffee have saved resources in this field, which can be invested in growing the business and investing in its customers worldwide. References ASQ, 2004. Organisation Wide Approaches. Benchmarking. [Online] Available at: http://asq.org/learn-about-quality/benchmarking/overview/overview.html [Accessed January 07, 2011]. COSTA, No Date. The Costa Story. Home. [Online] Available at: http://www.costa.co.uk/coffee/costa_story.aspx [Accessed January 07, 2011]. COSTA, No Date. The Costa Coffee. Coffee. [Online] Available at: http://www.costa.co.uk/coffee/the_coffee.aspx [Accessed January 07, 2011]. COSTA, No Date. Responsible Coffee. A Cupful of Responsibility. [Online] Available at: http://www.costa.co.uk/coffee/responsible.aspx [Accessed January 07, 2011]. Coffee Explorer, No Date. Coffee Explorer. Roaster. [Online] Available at: http://www.coffee-explorer.com/us/coffee-machines/coffee-roasters.html [Accessed January 07, 2011]. 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