I. Introduction
Insomnia Coffee Company is an independent coffee chain from Dublin, Ireland. At the moment, the company has over 150 stores and over 350 self-service units in the Ireland and UK market (Insomnia, 2018). From its single location in Galway bookstore in 1997, Insomnia Coffee has tremendously grown and has merged with Bendini & Shaw to complement beverages sold by the company. It was April 2012 when the company opened for its street franchise with the opening of 15 franchise stores in five years. Partnership with Debenhams in 2015 led to the opening of the coffee store in the United Kingdom as well as in Ireland. Over the years, Insomnia has expanded and added new products and services into its portfolio.
This assignment is going to discuss the external environment of Germany being the target market for the expansion of the company. It is also necessary to look at the competitive situation of Germany to understand how these factors are going to affect the strategic positioning of the company as it enters the new market. Furthermore, it is also necessary to look at the strategic capabilities of the company to ensure they are able to use the same in formulating the right competitive strategy that should be implemented.
II. General External Environment
It is necessary to look at how these variables could drive success or failure of the organization.
Political. After the chaos of World War II, Germany has been a democratic republic with the reorganization and restructuring of West and East Germany. The constitution remains the foundation for the value and action of the country. Germany is part of the larger European Union with its Chancellor leading the bloc (Tomlinson et al., 2018). With the Brexit, Germany is the sole most powerful country in the European Union with the capability to sway decisions of the bloc. The political stability of Germany has provided a stronger hold on the EU as they try to work out a plan that will strengthen the bloc as well as all member states including Germany.
Economic. The economy of Germany is relatively the largest economy in Europe and the fourth largest GDP in the world. As an economic powerhouse of Europe, Germany has attracted larger investments from various multinational companies around the world (Sassen, 2011). It is also necessary to note that with the strength of Germany’s economy, it is also an important trading and economic hub of EU. Germany has low raw materials which attracted investment. The service sector of the country has the largest part of the country's GDP. Popular brands of automobile also come from Germany.
Socio-Cultural. With more than 80 million residents, Germany is largest in population of the EU bloc. Economic growth of the country has made its modern and multicultural (Rommel). At the top of the socio-cultural diversity is the importance of the family. This means that most Germans value their family and their heritage. Young people foster good relationships with their families. With the growth of the country and the frequent hosting of international events such as Formula One, Germany’s society resembles more of the modernized cities around the world. Socio-cultural appreciation of coffee among citizens is a major boon for coffee and other service companies in the country.
Technology. As already noted, Germany is a major importer of automobile such as BMW as well as energy supplies (Altenburg et al., 2015). The country is highly innovative and is focused on science and technology with several research and development or independent laboratories in the country. Priorities of technology are being followed up and aligned by the Ministry of Science and Technology. The research and development spending of most companies in Germany has consistently grown over the years with the focus on improving technology and make sure that the country is at par with the research and innovation of other countries.
Figure 1 R&D of Companies in Germany
Environment. Environment is very important for Germany. Like all other industrialized and highly developed nations, pollution is a major problem for Germany, but they are able to control the issue. The country has increased efficiency in using raw materials as well as the increase of using renewable energy to ensure they are able to use cleaner technology to keep the pollution at bay. Germany is leading the European Union in terms of protecting the environment from further degradation (Pacesila et al., 2016).
Legal. Germany has increased legal frameworks against terrorism. There are several issues on the abuses of the government against minority groups. While the legal framework of the country has remained democratic, there are new safeguards being made against migration. It is important for the country to keep up with the legal frameworks that are able to maintain the stability of the country.
III. Competitive Environment
In order to understand the competitive environment of Germany, it is important to use Porter’s Five Forces of Competitive Advantage. The summary of the competitive environment is shown below:
Figure 2 Porter's Five Forces of Competitive Advantage
Threat of new entrants. Establishing a coffee shop does not need massive capitalization. This results to the moderate impact of entry of new players in the market. With the entry of Insomnia in Germany, the company needs to consider establishing the brand fast and better as new players may enter the market. However, it is necessary to note that while there is low capitalization or investment for the establishment of coffee shops in Germany or any given country, there is a high level of patronage among market consumers. This means that brand name is important for them.
Threat of substitutes. There are number of products that could be used as substitute for coffee. They can be juices, tea, alcoholic drinks or other non-alcoholic drinks that come in various tastes and brands in the market (Anese, 2015). On the other hand, there are also pubs and restaurants that could be directly engaged with the customer market of Insomnia Coffee. With the rise of homemade products and organic or healthy living, consumers may also opt to make their own drinks. In essence, there are several substitutes that could take over what Insomnia Coffee is selling. However, it is important to consider that with the increase of quality and ambiance that the coffee shop can give, this one is hard to substitute with any other.
Bargaining power of buyers. Consumers of Insomnia Coffee does not have a high bargaining power. The bargaining power of buyers can be tagged within low to moderate. The individual purchase of consumers do not really have a strong influence on how the business works. In the same manner, it is also hard to solidify the bargaining power of buyers as the market is diverse and greatly segmented. It is also important to note that customers of Insomnia Coffee are grealty sensitive to quality and they are willing to pay premium for the same. However, Insomnia Coffee still needs to consider the pricing strategy to ensure they are not alienating the market or pushing them toward switch with other brands in the market such as Starbucks.
Bargaining power of suppliers. The bargaining power of suppliers is also within low to moderate level. To be able to make sure they are able to compete in the market, Insomnia Coffee uses diversity in its suppliers. This means that the organization maintains strong relationship with several suppliers and coffee farmers to ensure they are able to keep the supply chain checked. Insomnia Coffee directly engages with coffee farmers and not just manufacturers and intermediaries. They want to make sure that the best quality coffee beans are served in its shops. But this does not mean that suppliers of the company has no control over what they want to do with their produces. As a result, they still wield moderate influence over the strategy of the company.
Competitive rivalry. There is intense rivalry in the market. With the entry of barriers being low to moderate, the competition is extremely high as companies need to make sure they are able to keep their customer base. Starbucks remains as one of the toughest rival in the market being synonymous to quality beans and relaxation (Beebe & Hemphill, 2017). There are other premium coffee shops in the region that can also take much of the market share Insomnia Coffee wants to gain. However, there are also new competitions coming from restaurants or fast food chains. McCafe of McDonalds and coffee of other stores are gaining traction with the market. With the growth of the market, it is very important to consider how the brand is going to keep up with the rivalry.
IV. Internal Analysis: Strategic Capabilities
The strategic position of Insomnia is reinforced by its resources. The resource audit focuses on physical, financial, human, and intangible resources that could be used by the organization.
Physical. At the moment, there are 150 coffee stores and 350 self-service units within the umbrella of Insomnia Coffee. While some of these physical resources are franchised, these resources are used by the brand to engage with customers and to market its services and products. With the entry of Insomnia in Germany, they need to set up physical stores and self-service units throughout the market.
Financial. For 2016, Insomnia Coffee had a profit of €1.93 million (Irish Examiner, 2016). With the capitalization of the company, it has the resources to expand to other locations and markets. The financial resources of the company is an important aspect for its strategic direction and position in the market especially with the fast changing environment they are in.
Human Resources. For Insomnia Coffee, quality is an important aspect of its service. Human assets of the company are very important for its growth. They are well-trained and experienced in serving products of the company. The workforce follows a culture of honesty and friendliness to the customers as the primary focus of the organization (Valmohammadi & Roshanzamir, 2015).
Intangible Resources. Insomnia Coffee has reached its popularity as a high-street quality coffee in the market. This is an important resource that could be used by the brand as it expands to other locations as well as in attracting new franchisees. Being tagged as a quality coffee brand is a unique resource that could be used by Insomnia Coffee in its strategic direction.
Aside from these resources which could be used by Insomnia to capture the market, there are also core competencies to be included in the formulation of the organization’s strategy.
Quality Coffee Products. Insomnia Coffee banks on its reputation of having quality coffee products in the market. This is an important competency associated with the brand which can be used in developing the image as well as the branding. Insomnia communicates with its suppliers to ensure they are able to provide quality coffee products. As already noted, human resources are trained properly for them to know how to serve the coffee at is best with the behavioural training focused on how they should communicate with consumers.
Accessible Locations. Insomnia Coffee locations are in major streets. They are accessible and can be easily seen by the public. Insomnia’s engagement depends on its accessibility to the public. The franchising approach in growing the number of branches is important core competency for the organization. With the growth of its branches, they are able to get closer with the customer.
Affordable Prices. Prices of Insomnia Coffee products are affordable. While the brand is serving quality products, they are keeping the affordability of coffee products to ensure they can serve the population at large. Insomnia wants to remain affordable even with the increased quality it aims to reach. This commitment to affordability and quality is based on the philosophy and core values of the organization.
V. Basis of Competitive Strategy
The plan of Insomnia Coffee to enter the German market plays an important part of the company’s strategic direction. The right competitive strategy can help the company to keep its sustainable growth as well as meet its objectives. In this regard, the Bowman’s Strategy Clock is used to discuss the possible alternatives that could be chosen.
Figure 3 Bowman's Strategy Clock
In entering the German market, there are two possible options or strategies that are reasonable to follow. First, the focused differentiation will position Insomnia at the highest stratum of the market (Brown, 2017). This means that the pricing strategy will be at its highest with the perceived value at its highest as well. In this regard, the strategy deems that the value of Insomnia is highest in the market. This banks on the brand image of the organization. However, if the market does not perceive Insomnia Coffee as having the highest perceived value in the market, this strategy will fail.
Second, the differentiation strategy is a level below focused differentiation. Like focused differentiation which banks on the reputation and brand image of the organization, differentiation is anchored on the highest perceived value added to the brand image (Barin et al., 2015). Product quality is very important in differentiation as it will be the core of the branding strategy. Insomnia Coffee is perceived as a high-quality coffee street brand, thereby it can use the differentiation strategy as its market entry approach.
With this, the differentiation strategy is the best way to go for the brand. Strong brand awareness is used by Insomnia Coffee using its stores. With the quality service provided by Insomnia, each branch becomes a brand marketing platform. As a result, there is a strong brand awareness among consumers as they can easily associate the brand with quality coffee products (Datta et al., 2017). While the brand is new in the Germany market, the experience of the brand in Ireland and in the United Kingdom becomes the foundation for the strong brand awareness being developed.
Furthermore, with the franchising approach of the business to grow its network allows the positioning of the brand in major cities. Strong brand awareness in major cities of Germany is a must. This will establish the brand in the new market target. While the experience in Ireland and the United Kingdom creates association to the brand, it is also necessary for the brand to reinforce the same with the experience that customers can have in the first branches of the coffee brand in Germany.
Aside from this one, it is also important to note that with the brand image, differentiation is also anchored on loyalty of the market. While Germany is a new market, the loyalty of customers in the United Kingdom and Ireland plays a crucial role in the brand awareness. The loyalty of customers can help bring in awareness through feedback and reviews that could be provided by the customers. The good thing about differentiation is that when customers are able to experience the quality service and products of Insomnia, they will be loyal to the brand.
VI. Conclusion and Recommendations
The right strategy to be used in entering a new market for Insomnia Coffee is differentiation. With the brand image on quality and the human resources of the company as part of its core competencies, the differentiation strategy will take advantage of the quality reputation of the brand as well as the ability of the human asset to provide the expected service. Brand loyalty is core to the strategy of Insomnia as they aim to communicate their service to the market and develop associations for the purpose of generating loyalty.
While Insomnia Coffee has a strong capitalization and investment with the profit of more than 1 million euro, the approach of expansion using franchising is advantageous for the brand. It would be financially bad for Insomnia to establish its branches throughout Germany. But with the franchising approach, they will be able to create awareness about the brand and easily reach its customers throughout the country without the need to spend more out of the company’s capitalization. More than this, with franchising, Insomnia Coffee will be able to create a strong network wherein loyalty can be made.
The choice of Germany as the new market that should be entered by Insomnia Coffee is the best. First, this is anchored on the reality that Germany is within the European Union, and even its leader as noted. This eases the manner of entering the new market for the brand. The economic bloc shares almost the same framework with each other. Even with the Brexit, EU still has a strong market. Growth of Germany as the largest economy of EU is a good economic environment for any business especially with the increasing service sector contribution to the GDP of the country. Second, with the strength of Insomnia Coffee in Ireland and the United Kingdom, they have the same culture. This alignment means that the taste and demand of British and Irish could have similarity with those who live in Germany. Insomnia Coffee does not need to adjust or tweak its services and even culture as it will simply align with the new market.
Third, with the entry of Insomnia Coffee to Germany, they will be able to take advantage of movement of people throughout EU. It will be an additional way for the brand to easily capture the new market. Those who live in the United Kingdom and may transfer or travel to Germany will opt for the Insomnia Coffee service and products. As a result, they can introduce the same to their co-workmates and friends. Sharing of the regional economy increases integration and thereby creating a large market that moves over time.
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