Expanding Business of Coffee Shops - Case Study Example

BUSINESS EXPANSION Student’s name Code & Course Professor’s name University City Date Contents 1.0Introduction 3 2.0 The Ansoff Matrix 4 2.1 Market Penetration 5 2.2 Comparative Analysis of Pharmaceutical Business and Coffee Business 6 2.2.1 Pharmaceutical Business 6 2.2.2 Coffee Business 7 2.3 Risk Management 7 2.4 Market Penetration to Market Development and Associated Risks 8 2.5 Market Penetration to Product development and Associated Risks 9 2.6 Market Penetration to Diversification and Associated Risks 11 3.0 Conclusion 13 Reference List 14 1.0 Introduction In the life cycle of businesses, the growth stage is characterized by increase in revenue and the number of customers that a business receives. Also referred to as the survival stage, this phase requires strategic thinking, creativity and proper decision making on the part of the business stakeholders involved in the organization. The advantages of business growth are attractive to any organization with a vision to develop strategically and gain considerable power in the business industry (Rorthaermel, 2015). Businesses seek expansion to make their brand recognized in the market, build business value for all the stakeholders involved and offer a wider and selective range of products and services for its customers (Czinkota, and Ronkainen, 2013). The success of businesses is continuously being demonstrated in their capability to adapt to the rapid changes taking place globally. It is currently mandatory for organizations to be naturally flexible in order to show this capability. Among the strategic options that managers could use to successfully launch themselves of expansion is the Ansoff Matrix which is a technique for business analysis that enables managers to identify the opportunities for growth (Jenkins and Williamson, 2015). The Ansoff matrix shows four different business strategies and the risks involved with every strategy. The strategies are based on the industrial market and the products and services of organizations (Thijsen et al, 2014). The differences henceforth that are observed in the successes of various organizations are primarily based on their ability to find innovative ways which enable them to adapt to change. Studies have shown that most successful companies and those seeking to be successful have launched into introducing novel products in fresh markets and additionally establishing new goods in markets that exist (Hill, Jones and Schilling, 2014). This is otherwise referred to as diversification. This retro respect paper therefore seeks to discuss diversification as a strategy, basing its reference on a pharmaceutical company seeking to expand into the business of coffee shops. 2.0 The Ansoff Matrix In order to combat the economic crises and achieve market dominance, a competent business company needs to focus on expanding its market and diversifying its products in the business industry (Kotler, 2015). The company needs to strategically increase its growth and reduce risks through diversifying its business globally, offering more valuable products and simplifying the operation model. The company can additionally focus on a totally different market. As such, the following section discusses the Ansoff matrix and other diversification strategies. The Ansoff matrix, a template developed by Igor Ansoff for diversification strategies provides an outline which enables the identification of growth opportunities (Thijsen, 2014). It further assists in the determination of certain implications of following various business strategies. The Ansoff matrix examines new and existing products and markets and uses this to determine the strategies to be followed. This tool is therefore important for businesses seeking growth as it provides a clear sketch of the opportunities present and the risks involved thus giving business information that is imperative to go forth with the chosen approach. Below is a diagram of the Ansoff matrix. Product Market Current Potential Current Market infiltration Product expansion New Market expansion Diversification 2.1 Market Penetration This strategy involves the increased selling of products and services to both new and existing customers who are categorized in the same market (Morden, 2016). The approach constitutes of the lowest amount of risk that an organization can take thus making it a safe way to approach the growth of the respective company. The strategy takes to value the key function that has enabled the company to be successful therefore does not allow any other operation to jeopardize it. The key function could be the competence of the research and development team which has enabled the company to launch successful products such as in Glaxosmithkine (Glaxosmithkine, 2016). Through focusing on a major strength of the company, market penetration helps to make sure that the organization benefits from the opportunity while at the same time incurring minimal risk. There are various approaches involved in the achievement of this strategy. The first one encompasses maintaining the share of the existing products or additionally increasing the market share. This move is done by Glaxosmithkline. The company has a strong cash flow which enables it to move into other markets safely, merge and also acquire other businesses. This approach can be achieved through competitively pricing the products of the organization and improving on the strategies for pricing and promotion of sales. The second approach involves the identification of a new segment in your market and intensively targeting this market. In the scenario of a pharmaceutical company such as Glaxosmithkline, there have been tactics to increase sales through reaching a new segment in the developing world. Given the need of medical products in the developing world and the brand name that GSK possesses, the move is both profitable and has a low risk (Glaxosmithkine, 2016). The third approach encompasses the restructuring of a market that is mature to eliminate competition while the fourth persuades customers to increase their use of the organization’s product. Glaxosmithkline for instance aims to market its products aggressively and comprehensively and promotes widespread public relations which take place through various communication media. Apart from this, the company has heavily invested in its research and development team which is tasked with ensuring that opportunistic markets are tapped into at the right time and in the right way. 2.2 Comparative Analysis of Pharmaceutical Business and Coffee Business 2.2.1 Pharmaceutical Business The pharmaceutical industry is characterized with huge barrier to entry owing to the policies put in place and legal requirements for the establishment of such a company (Miemietz, 2013). Substitute products are additionally a consistent factor in the industry as other companies provide generic drugs which are cheaper. Furthermore competition is not fierce as there are few players in the market and a wide consumer base that requires medical products. Based on increased consumer expectations, the pharmaceutical industry is expected to provide better products and services thus contributing to the change of the market such as development of new markets and products (Miemietz, 2013). The aging population and lifestyle change are particular dynamics that have necessitated the employment of strategies to expand and still provide for the need in the industry. This change is both an opportunity and a threat for pharmaceutical companies. The opportunity is in the existence of a new market to invest into and gain more market share while the threat comes in the cost of meeting the expectation of the current market which may prove to be a risky venture. 2.2.2 Coffee Business Entry into the coffee business is relatively given its popularity and the rate at which it is consumed (Rosenblum, 2015). Success in the industry is however different owing to established brands such as Starbucks and McCafe. Generally, the bargaining powers of suppliers is limited since most come from developing countries and are rarely in the position to raise the prices of the raw product. The major competition for coffee is tea which is equally popular and in some countries regarded as the chief drink. Furthermore, there are substitute products that can be taken instead of coffee such energy drink. Consumers moreover have the major bargaining power and coffee businesses are continuously seeking to tailor the drink experience to their consumers. The following section therefore discusses risk management and feasibility of a pharmaceutical business diversifying into coffee business. 2.3 Risk Management The management of risk involves identifying potential risks to an organization or aspects of an organization and evaluating ways to help eliminate the risk or reduce the impact of the risk (Lam, 2014). Identification of the potential problem helps in making decisions that involve the best way to handle the risk. Risks can be avoided, controlled or left alone. The identity of the risk will hence help to decide how the pharmaceutical company needs to tackle with the potential difficulty. The first risk identified in starting a coffee business by a pharmaceutical company is the capital intensiveness of initiating a completely new product in a new market. The company should have extensive resources to start a new business so that this risk can be eliminated. The second risk faced is the complete difference between the products which might cause confusion and a reserved attitude by consumers over the new product. This risk can however be balanced if the present pharmaceutical company has an established brand with a good image and reputation. The levels of the risks are dependent on the type of expansion approach that an organization chooses. The risks are additionally in effect to various sectors of the company such as the finance sector, legal or human. The subsequent section discusses strategies based on the Ansoff Matrix while outlining the associated risk to the approaches. 2.4 Market Penetration to Market Development and Associated Risks The market development strategy is inclusive of selling the current products into novel markets. This could mean tapping into different geographical markets, offering a new dimension in the product through aspects such as repackaging, focusing on different distribution channels and implementing different policies that involve pricing in a new market segment. The strategy to develop a market requires that the organization possess massive intelligence on the competition and intuitive details of the market (Morden, 2016). Competition among pharmaceutical companies is limited due to the restrictions and policies put in place for the establishment of such companies. This means that recognition of a new market can easily be determined given the few players in the market. The organization should further research on the market and other operational aspects. The risk involved in the development of the market is quite moderate. An advantage that pharmaceutical companies have that can be viewed as an opportunity for expansion is the increasing awareness of health among individuals and the change of life styles that has brought about various new illnesses. Through research and development of their products, pharmaceutical companies are able to tap into these new market segments by creating drugs that target the arising difficulties. Health awareness is an opportunity for market development in that through the needs that potential clients foresee in their healthy diets, pharmaceuticals are able to provide supplements for the dietary needs. The provision of drugs with supplementary benefits is a contemporary trend though consumers are wary of the developers of the product. As such, companies with a reputable brand are much more likely to benefit from the development of the market as compared to those without. These consumers provide a market segment of their own based on both awareness and lifestyle. As earlier mentioned, the risk associated with this strategy is moderate. Given that the market segment is relatively new, there is a dire need of aggressive marketing which puts a dent in the costs hence contributing to a financial risk. The costs needed, though departmental are still large enough to affect the operations of other departments. The risk arising from the company’s competition also needs to be addressed as this may create a major drawback to the organization. Knowledge of the competition’s vision and goals is thus better at giving the company a specific direction towards approaching the new markets which makes the risk moderate as well. 2.5 Market Penetration to Product development and Associated Risks Developing the product requires comprehensive research and development on the particular product, an evaluation of the needs of the clients and a clear passage for the extension of the brand. The product development strategy involves a relatively medium risk though the extension of the brand would be a high risk initiative as seen from the Ansoff Matrix. This is because of the difficulty in prediction and the potential it has of confusing the customer. Development of a new product is costly to any company as many operations are required to ascertain the workability of the product. Departmental costs cover the research and development team, the sales and marketing team and the production team as the main departments. Well established pharmaceutical companies are not likely to develop completely new products for survival due to their brand reputation. They however have to lead in product development especially in the discovery of a market need as their image will lead consumers to seek out their products as a first choice. Development of new drugs carries the risk of costs involved in researching on the problem that the drug will treat, the need of the client and creation of a drug whose side effects will not harm the client and cause litigation to the company. Legal cases on pharmaceutical companies are also a major risk and a proper example is from Takeda pharmaceuticals whose drug Actos was determined to cause bladder cancer to a patient after several years of use leading the company to settle for 9 billion. Financial and legal risks are thus major threats to the company and could result to a company facing closure. With regards to this is imperative for pharmaceutical companies to carefully assess the possible risks and avoid product development should the risk outweigh the benefits. Drugs that treat lifestyle diseases for instance are complex and need intensive research which is costly and on the other hand is the costs are minimized then the resultant risk would be litigation in court. Moreover, mass tort law firms have been known to heavily attack pharmaceutical companies that have the slightest problem with a drug as these cases tend to fetch huge settlements. Among the benefits of product development is the influx of large profits as a company gets a new and ready market to consume its products. However, high costs involved and intensive development of the product may not reflect on the return on investment as fast the company wants it to thus making it a risky venture. Nevertheless, a large pharmaceutical company with enough resources and established R&D facilities to invest into product development faces less risk as compared to a smaller company whose failure may affect the entire company. 2.6 Market Penetration to Diversification and Associated Risks The diversification strategy achieves growth in the market by focusing on an entirely new and different market (Hallback and Gabrielsson, 2013). This is the best strategy for a pharmaceutical company to use should it plan to enter into the coffee shops business. The diversification strategy is the approach with the highest risk in the Ansoff matrix. First, the organization that seeks to branch out has no idea or experience in the new market. Furthermore, the skills, operations and functions required to carry out tasks in the new market are completely different from the ones that the organization uses. At times the strategy is carried out through involving an establishment that already operates in the same field. Organizations that adopt the diversification strategy need to be completely sure of the goals that they have set to achieve growth in the new market (Grant, 2016). There should be a thorough assessment of the risks involved as well as this will help to determine what can be avoided in the implementation of the strategy. Among the risks involved in expanding into coffee business by a pharmaceutical company is that of immense criticism from consumers. However, reputable brands such as the one that GSK has created could help the new consumers associate their products with safety and care thus embrace the company’s initiative. The organization should additionally have enough capital to venture into the business and a willingness to invest into the new market. Glaxosmithkline has extensive resources which can enable it into enter into the coffee business without losing much of its ground in the process. Diversification further requires expectations on potential gains that are clear and a correct equilibrium between the risk taken and the reward expected. The expansion into selling of coffee and coffee service is a typical example of full diversification as the coffee business is a completely new market and different from that of the drugs business. The expansion will occur at the organizational level where the company will integrate a new company into the one in existence. Full diversification is the most risky type of diversification. The other two diversification approaches are backward diversification where the organization chooses to diversify on the merchandise or service in the foregoing stage of the current product. Forward diversification is the opposite where the company diversifies on a product that follows the current product of the company. Should a pharmaceutical company diverse into the coffee shops business, then it runs the risk harming the main business of the company as the management required to run two different sets of business needs to function at a higher level. Glaxosmithkline though has enough resources to get into the business given its cash flow. The entry into the new market might however be met with acceptance or rejection of the product based on how it is launched. The achievement of success in this market will require excellent management skills and thorough monitoring of the business processes. A high risk expansion strategy is usually avoided since it has many uncertain factors that do not have immediate backup. Among the drawbacks is the loss of financial stability or closure, damage of company reputation and the indirect effect to employees and clients who were dependent on the company. 3.0 Conclusion In conclusion therefore, it is evident that strategic decisions involve choices that are extremely intricate, interdependent on various factors and uncertainties. The dynamic factors plaguing the business world such as technological changes, aggressive competition and potential hazards require that companies have approaches that ensure their survival in the market. There is thus a constant need to achieve market dominance. From the Ansoff Matrix, diversification has been determined as the strategy involving the highest risk while market penetration involves the lowest risk. Since the case used shows that the pharmaceutical company already uses market penetration as a strategy, the move from market penetration to market development would be advised as it rates as the lowest among market development, product development and diversification. Recommendations Based on the conclusive strategy to diversify with an approach that has the least risk, it is therefore recommended that the prospective company formulate a market development action plan. This action plan will help to assess all aspects that need to be covered during the actual market development. The action plan should have a vision and goals to achieve business growth through the strategy that has been chosen. Additionally, the prospective company requires formulation of techniques for the measurement of their performance in the development of the market. Performance measurement analyses the current progress that has been made against what the organization wants to achieve therefore assisting in decision making. Lastly, it is recommended that the prospective company expert skills in the new venture to ensure competency and minimize risks. Reference List Czinkota, M.R. and Ronkainen, I.A., 2013. International marketing. Cengage Learning GlaxoSmithKline plc., 2016. What we do. [Online] Retrieved from: http://www.gsk.com/about-us/what-we-do.html Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons. Hill, C.W., Jones, G.R. and Schilling, M.A., 2014. Strategic management: theory: an integrated approach. Cengage Learning. Hallbäck, J. and Gabrielsson, P., 2013. Entrepreneurial marketing strategies during the growth of international new ventures originating in small and open economies. International Business Review, 22(6), pp.1008-1020. Jenkins, W. and Williamson, D., 2015. Strategic management and business analysis. Routledge. Kotler, P., Keller, K.L., Manceau, D. and Hémonnet-Goujot, A., 2015. Marketing management (Vol. 14). Englewood Cliffs, NJ: Prentice Hall. Lam, J., 2014. Enterprise risk management: from incentives to controls. John Wiley & Sons. Miemietz, M. (2013). The Pharmaceutical Industry. CFA Institute Industry Guides, 2013(2), 1- 48. Morden, T., 2016. Principles of strategic management. Routledge. Rosenblum, A. (2015). Specialty coffee expansion in traditional retail: lessons from non- traditional retailers (Doctoral dissertation, Kansas State University). Rothaermel, F.T., 2015. Strategic management. McGraw-Hill. Thijsen, T., Tong, T. and van Leer, J., 2014. Ansoff Model. Marketing. Read More