Nowadays, there are many options and methods for entrepreneurs to start their businesses. Due to such processes as globalization, immigration, and industrialization, millions of people are able to travel and cooperate at different levels. The creation of a coffee café in Nepal is not an innovative idea. The production of coffee is a distinctive characteristic of the country’s business, with about 513 metric tons being produced annually (Coffee production rises, full potential untapped, 2019). However, many young entrepreneurs believe that could make some contributions to this area of business, and Shrestha, Pradhan, and Gurung are some of them.
Young people discovered the possibility to open a café and develop a chain of cafés named Kaffeine. However, as well as any leaders, they must discuss a number of questions, including location, existing competition, investments, and prices. The big issue of the case is the necessity to deal with a competitive advantage and establish professional business relationships. Communication is the main issue to consider and succeed in their business attempt. The application of Porter’s 5 forces analysis and the theory of competitive advantage will help Kaffeine solve its organizational concerns.
The organization under analysis is Kaffeine, led by three young Nepalese employees. It is a new coffee café that is located on a small street, close to one of the busiest streets of the city, Durbar Marg. There are many business offices where large companies, malls, and hotels have already been recognized by the locals and tourists and achieved success. In this case, much attention is paid to the location of the building due to the already existing cafés that are defined as the potential competitors for Kaffeine.
Himalayan Java Coffee has a significant back-story and strong social media presence, The Coffee Shop attracts wealthy tourists, Magic Beans focuses on local distribution, and Coffee Express provides customers with products in a short period. Kaffeine turns out to be a new brand that gives birth to a large chain of similar cafés due to the fast-growing economy of the region and the evident passion of citizens for coffee.
In this organization, leaders aim at serving three groups of potential customers. They include business people who work nearby and want to spend their free time in a calm and relaxing atmosphere. Tourists who come to visit one of the main sights of the country, Mount Everest, might also visit the café and enjoy the offered culture and traditions. Domestic students could find Kaffeine an interesting place to go as well due to their desire to try something new and discover another quiet study spot.
There are three main sources of coffee products: local beans, imported beans, and branded imports. Such aspects as price, quality, and vision play a critical role for leaders to make their final choice. It is expected to spend between $63000-65000 for the initial investment and observe revenues within the next year, selling about 15,000 cups of coffee.
Taking into consideration the main facts about the organization and the peculiarities of the café industry and coffee business, several organizational issues may be identified. However, the big issue for discussion, in this case, is the competitive advantage of the Nepalese company. Amadeo (2019) defines the concept as something that makes services and products superior in regard to other consumers’ choices. In 1985, Porter developed a theory of competitive advantage that is frequently applied to the analysis of various organizational issues and evaluations (Lorenzo et al., 2018).
Its main idea is that a company and its leaders are responsible for determining their performance by means of properly weighted strategic choices and combined attributes to outperform competitors (Lorenzo et al., 2018). It is not enough to introduce a unique service and expect that customers choose the company among the rest. It is important to combine the ideas and have enough quality products, strengthen a product line, and enhance services and distribution tactics (Lorenzo et al., 2018). The competitive advantage is a complex issue in business development, and the leaders of Kaffeine should recognize its basic features.
Coffee consumption is a common activity of many Nepalese and tourists in the region. It is not only a necessity to buy a cup of coffee in the morning and set the tone of the day. In the chosen region, coffee tastes vary, provoking the establishment of a tradition where local interests and skills are considered. Many organizations like Magic Beans or Himalayan Java Coffee have already entered this business area, and Kaffeine is about to reach its first achievements, and the creation of the competitive advantage should be a goal. According to Porter (as cited in Amadeo, 2019), leadership, differentiation, and focus are the main strategies for small business companies.
The problem with Kaffeine is that its leaders are interested in discussing prices, sources, and investment appropriateness instead of providing a reasonable value of the whole picture as well. The competitive advantage has to become their number one issue for discussion with the already mentioned points being considered as its significant components.
Porter’s 5 Forces Analysis
To solve the problem that is based on the absence of the competitive advantage understanding, it is necessary to develop Porter’s 5 forces analysis according to the framework. There are five main dimensions in this model, including the bargaining power of suppliers and buyers, threats of new entrants and substitutes, and overall industry rivalry. As soon as Kaffeine leaders are able to recognize their threats and powers, they can be ready for rivalry in the chosen industry.
Power of Buyers
In many developed and developing countries, it is normal for entrepreneurs to open coffee houses and cafés for people’s entertainment. Buyer power is a critical element in the analysis of Kaffeine’s competitive abilities because it may lead to lower prices and increased costs and services. In the environment defined in the case, the bargaining power of buyers remains a significant (high) force. As soon as one mistake occurs, it is easy for consumers to find another brand and change their preferences. The presence of several groups of customers identified by one of the leaders (either students, or tourists, or business people) plays a crucial role in Kaffeine’s development.
Power of Suppliers
The power of suppliers is not as strong as in the previous dimension. Its weakness can be explained by the possibility for Kaffeine to choose between local and international sources. The differences in prices of the identified organizations are not extremely high (about Rs1, 000 per kilogram), and it does not take much time to find another source because coffee and tea supply is one of the common business activities.
Threats of Entrants
Kaffeine faces a moderate threat of new entrants in the case under analysis. On the one hand, at the moment of opening a café, there are no new players on the field, and the leaders investigate the already made achievements and approaches. Brand development and supply chain costs determine the possibility of new entrants. In Nepal, coffee shops, cafés, and restaurants usually address the same suppliers and are determined by the same economic standards and obligations. Therefore, it is necessary to consider the possibility of new entrants, but customers’ preferences and interests also influence business success.
Threats of Substitutes
Kaffeine, as well as any other coffee business representative, is under a high threat of substitution. There are many other goods and services that can be offered to consumers within the same region. A person can use a coffee machine at home or in a store, saving time and money. Instead of coffee with its potential threats to human health (hypertension, for example), people are able to drink tea, coca-cola, or juice and meet their basic needs.
Finally, the level of rivalry for Kaffeine is high due to the existence of the already developed companies and services in the city. It could happen that the customers of Himalayan Java Coffee or the Coffee Shop stay loyal to their preferences and do not want to try something new. Regarding the details of the case, Kaffeine is located within 10-15 minutes of a motorcycle ride from the nearest academic facility, and students may be “captured” but other places of entertainment. The coffee industry is characterized by high rivalry ratios, and leaders should understand how to differentiate their services and products at this particular moment.
Porter’s 5 forces analysis proves the presence of three strong forces, one moderate force, and one weak force. It means that the development of successful coffee business is not an easy task for Kaffeine, and certain recommendations must be given to solve the competition advantage issue. Additional help is expected to be promoted in such areas as cooperation and communication between the leaders, a thorough analysis of competitors, and the discussion of financial aspects of this business.
The first recommendation is to strengthen communication and cooperation between leaders at different levels. As it has been mentioned, three young men have a history of mutual studying at Kathmandu University (Shrestha and Pradham) and participating in social events (Shrestha and Gurung). All of them have a solid business background, but each of them chose a specific path in executive distributing, public trading, and venturing.
They succeeded in their businesses, and now, they want to work together and create another, not related to their past, business. The success of their business depends on understanding their managerial capabilities (Lorenzo et al., 2018). The outcomes of such cooperation are hard to predict, and, to be able to deal with challenges, these leaders must identify their goals, responsibilities, and areas of development.
Another improvement is recommended to touch upon the competitiveness of the organization. According to Lorenzo et al. (2018), the relationships that exist between managerial capabilities and competitive advantage are strong and include the professional guidance of managers. To be competitive, leaders should introduce their strategic vision and the possibility to manage human and financial resources. Shrestha has developed an investment plan that aims at covering a rent deposit, fixtures, and renovations within the next ten years. However, the participation of other leaders and potential investors remains unclear, and it is necessary to improve the competitive advantage by focusing on the role of leaders.
Finally, the evaluation of the organizational issues shows that financial problems challenge the leaders and their intention to open a new business. To compete with other organizations, Kaffeine managers have to demonstrate a high level of commitment and adequate financial resources (Pickett, as cited in Lorenzo et al., 2018).
The country where the café is located experiences considerable problems in electricity, the lack of funding resources, and limited educated human resources. As a result, the creditworthiness of entrepreneurs is hard to check, and a family business turns out to be the only appropriate financial resource. The solution of financial questions is determined by the ability of leaders to develop a competitive image, without inviting international investors to make sure this café is based on local traditions.
In general, the decision to create a chain of cafés Kaffeine is associated with a number of poorly discussed aspects. Three independent entrepreneurs want to open a new business that is common among many Nepalese organizations. However, due to the presence of the already developed companies that deal with coffee production, Kaffeine is not able to promote its competitive advantage, and specific recommendations are necessary.
Using the results of Porter’s 5 forces analysis and the theory of competitive advantage, differentiation, leadership, and focus cannot be ignored. There is high power of buyers and a high force of substitutes, which made the company concentrate on the quality of products and services and the recognition of some distinctive features in the already established coffee business. Kaffeine is not doomed to fail, but much work is required, including cooperation and communication between leaders.
Amadeo, K. (2019). What is competitive advantage?. Three strategies that work. The Balance. Web.
Coffee production rises, full potential untapped. (2019). The Himalayan Times. Web.
Lorenzo, J. R. F., Rubio, M. T. M., & Garcés, S. A. (2018). The competitive advantage in business, capabilities and strategy. What general performance factors are found in the Spanish wine industry? Wine Economics and Policy, 7(2), 94-108. Web.