Course Title: Business and Management
Module Name: Foundations of Business
Title of the Assignment: Planning, Organising and Controlling: Real
Coffee Ltd
Module Leader: Adrian Rivers
Student Name: Didar Nurbek
Word Count: 2000
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Real Coffee Ltd and coffee industry
The report aims to analyse and evaluate the coffee shops
industry and the strategy used by Real Coffee Ltd. Showing outcomes
of macro environment analysis possible impacts on Real Coffee Ltd
will be explained and assessed. Using Porter’s five forces analysis
nature of competition in the industry will be shown and how Real
Coffee Ltd is affected by them will be explained. Much attention
will be paid to the internal analysis which is divided into four
sections such as marketing issues, human resource issues, operations
issues and financial issues. The relevant analysis of the current
issues for each section will be explained. Besides, potential
solutions and recommendations for each issue will be identified.
Based on each issue and solution the author will propose future
strategic direction and explain how the proposals should be
introduced.
Effects from outside the industry
In order to be effective and keep growing Real Coffee Ltd has
to be able to respond to the changes and challenges from the
external environment quickly (Mullins, L.J. 2013). The analysis of
the external environment can be threats to as well as opportunities
for the company.
Among all found factors in the macro environment
technological and economic factors are likely to have significant
impacts on the future development of Real Coffee Ltd. Significant
developments of coffee machines (Euromonitor International, 2013)
would affect the Real Coffee Ltd negatively because market leaders
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such as Costa, Starbucks and Café Nero are able to obtain newest
machinery. Real Coffee Ltd, on the other hand, is much more
sensitive in spending on machinery. For instance, according to BBC
news a US company has created the coffee machine which is controlled
by sending text messages (BBC, 2012a). One of these kinds of devices
is likely to reduce consumers of Real Coffee Ltd since either the
device would be obtained by market leaders or by costumers to make
coffee at home.
There is not only one economic factor that might influence the
development of Real Coffe Ltd. For example, inflation fell to 2.2%
(BBC, 2013b) which means that costumers’ purchasing power has
increased. This will probably affect Real Coffee Ltd positively
since costumers will be able to visit coffee shops more often.
However, lower inflation rate may move costumers to high-quality and
brand coffee shops such as Starbucks, Costa and Café Nero. A change
in interest rate affects the whole economy and consequently coffee
shop industry too. Bank of England has recently decided that the
interest rate will stay the same of 0.5% and will not be raised
(Larry, E. 2013). If the Bank decided to increase the rate of
interest costumers would have been discouraged from spending on such
activities as ‘hot drink breaks’ because high interest rate attracts
people to save their money in banks.
Forces that affect the industry
Porter’s 5 forces is a useful tool when analysing the
competitive forces of the industry (Gordana, V. 2013). These forces
include: threat of new entrants, threat of substitute products,
bargaining power of supplier, bargaining power of customers and
intensity of rivalry between competitors. This analysis will help to
choose right strategy for Real Coffee Ltd. According to analysis
have been done there is relatively high threat of new entrants for 3
Real Coffee Ltd since cost of entry to the market is low (Jennifer,
J et al. 2010). Although it takes some time to open up a new coffee
shop, all it needs are coffee machine, coffee beans and staff
skills. In addition, there is high potential for economies of scale
in the market. For instance, any technological development such as a
new product-efficient coffee machine is likely to reduce cost of
production. Furthermore, except local coffee shops and cafes there
are three main market competitors – Costa, Starbucks and Caffe Nero
– with which Real Coffee Ltd has to compete (Mintel, 2013a).
Therefore, as there are many potential competitors in the market
rivalry among existing competitors is high. Since the nature of
competition is important other factors of the analysis are shown in
the appendices.
Marketing issues
There are two main reasons for Real Coffee Ltd to change the
marketing strategy significantly although it requires spending
money. First, the most frequent visitors of coffee shops are those
aged between 25 and 34 (Mintel, 2013b). Second, old people do not go
out as often as those who are 15-24. However, as “40% of costumers
are over 55” Real Coffee Ltd should not exclude them from targeted
group.
It is common to use multivariable segmentation nowadays
(Brassington, F. & Pettitt, S. 2013), potential customers are better
segmented in groups by age and occupation. In terms of age,
costumers have been split into three groups: 15 – 24, 25 - 54 and 55
and over. In terms of occupation, groups have been split into
students, pensioners and businessmen and white-collar workers.
Although students do not earn money directly, their parents provide
them with money. In addition, since students have more free time and
are influenced by the Internet, it is easy to attract them through 4
media ads. Businessmen and white-collar workers aged between 25 and
54 are considered as the main potential customers. They are likely
to have a meeting or break at coffee shops. Although they require
good service and high technology in a coffee shop, they are willing
to pay for them. The last group of older people is also important
and does not require much. Therefore, newspapers, magazines,
cleanliness and comfortability are all they need. It is also highly
advised to pay attention on positioning. Since it is difficult to
compete with the main competitors in terms of quality of their
product, Real Coffee Ltd should concentrate more on price and
promotion.
Human Resource Issues
Human resource is the most important tool in an organization
and the human resource department aims to maximize productivity of
employers (Bhagria, A. 2013). There are two identified weaknesses of
Real Coffee Ltd in hiring and training the staff. First, Real Coffee
Ltd does not provide employees with training and practicing. Second,
zero hours contracts are not effective in terms of staff loyalty. It
is important to provide employees with training because it increases
competitiveness in the market, helps to handle risks and brings good
relationship with employers (Lindblad, M. n.d.). Although employees
may be absent for the work while they are training, it helps them
both employees and employers since staff becomes able to perform its
job better (Frost, S. n.d.). Therefore, it is preferable to invest
in training. Zero hours contracts are cost-effective, legal and
employer can avoid liabilities and rights of an alternative
employment contract (Spanjers, S. 2013). However, provision of
training is best mixed with use of traditional employment contracts.
This is because a traditional contract improves staff turnover and
service generally (Pennycook, M. 2013).
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Although there are several issues in Real Coffee Ltd
structure, the main issue that should be fixed is formalization.
Formalization is “the routine nature of succession” (Webster, L.A.
n.d.) and, therefore, more rules and responsibilities are likely to
improve the structure. Rules and responsibilities are better to be
identified between employees and especially between two managers –
Alice and Ross. Delegation of roles and responsibilities clearly
identifies tasks and, thus, improves the functioning of organization
(Rao S.R. 2009). This may also include regular scheduled meetings to
which managers should bring evidence and support for their
proposals.
Operations Issues
Operations issues are all the problems that occur during the
production and delivery of products and services (Boddy, D. 2011a).
Since Real Coffee Ltd delivers both product and service to
customers, it should concentrate on both of them. One of the main
strengths of Real Coffee Ltd is having a wide range of flavours of
coffee because market leaders have been working on adding a variety
of flavours of coffee too. There are five operations activities help
to describe and analyse an organisation’s operations system
(Sprague, 1990). These activities are: capacity, standards,
materials, scheduling and controlling. The main activity that Real
Coffee Ltd has difficulty with is materials. According to
information gathered about Real Coffe Ltd it holds high levels of
stock in order to lower the price. It is risky and inefficient
because except space, insurance and security costs, stocks may
become out of date or damaged (Hamel, G. n.d.). Thus, high levels of
stock can lead to a worse situation than the lack of stock. Of
course, due to uncertainty in demand it is safe to have a buffer
stock. In any case, the Managing Director can get materials for
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lower price by buying either high levels of stock or low levels of
stock using offers and discounts as suggests the manager. Therefore,
it is advisable to decrease the stock level to a reasonable amount.
Another main activity that Real Coffee Ltd should work on is
control. It involves four steps: setting objectives, measuring,
comparing and acting (Boddy, D. 2011b). It helps to move immediate
operations towards objectives and learn lessons for future
improvements.
Financial Issues
Research has positively shown that Real Coffee Ltd has enough
resources to pay all debts over the next year and to wait for the
payment from its creditors for 35 days (Finance, n.d.). Besides,
revenue growth between 2008 and 2013 was 20%, which is good. Acid
test ratio tells that the company is not able to repay all debts
using its most liquid assets (Jan, I. n.d.a). It is preferable to
improve it by “converting inventory to cash or accounts receivable”
(Winmark, n.d.). In addition, stock turnover of the company of 3
times is too low. This is one of the main financial issues that
should be solved. In order to solve this it is advised to increase
promotional budget to increase demand for products and services of
Real Coffee Ltd (Louise, B. n.d.). Return on capital employed (ROCE)
is the key profitability ratio which is another issue that should be
solved. Cutting costs and buying raw materials for cheaper price are
two ways to improve profitability (Jan, I. n.d.b). Although not
important as stock turnover and ROCE, net profit margin and gearing
or leverage should be also increased by focusing on growth.
Proposed strategy
Having done research it has been identified that preferable
strategic direction for Real Coffee Ltd is aiming for growth. By
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using the product/market matrix it has been chosen that the best
suitable strategy for the company is a market penetration. It aims
to increase market share by reducing price, advertising and
improving distribution (Boddy, D. 2011c). This strategy has been
chosen because Real Coffee Ltd had not yet spent on promotion which
plays significant role in marketing (Brassington, F. & Pettitt, S.
2013). Improved quality of the products, discounts and relevant
promotional advertising are effective tools to increase market share
(Joseph, C. n.d.). More distribution channels also increases market
share in the industry. In order to achieve aiming point weaknesses
of the company should be turned into strengths and opportunities
should be used. Managers should know where the company is going, its
activities and purpose to operate successfully (Dr. Williams, B.
n.d.). A mission statement exists for this purpose. The mission
statement chosen for Real Coffee Ltd is “To distribute from small
coffee shops to the country”.
Proposed implementation
First step that Real Coffee Ltd is advised to take is
targeting right segment. Taking information about target market into
consideration the company should start spending on promotional mix.
This is likely to increase number of customers as well as stock
turnover. It is also highly advised to spend on training and,
consequently, use of traditional employment contracts. The main
mission of HR management is to create ‘a crew’ which will act
effectively and productively. It is also important to have meetings
regularly applying decentralisation to make decisions, discuss
issues and proposals with managers. Clearly identified duties and
responsibilities of managers should be introduced and roles of
managers should be clarified. Real Coffee Ltd should be controlling
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activities of the company by measuring figures, comparing them and
acting accordingly.
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