It seems reasonable to state that the Kaffeine case contains a number of important issues that are to be addressed. The entrepreneurs should take into account many points if they pursue the aim of remaining profitable company in the long term. Both internal and external business environment provides them with several risks that may lead to insignificant performance. On the other hand, the given conditions have some opportunities that can serve as a great foundation for the success of the Kaffeine enterprise. Hence, it might be rational to apply an in-depth analysis of the business situation of the firm in order to find out whether setting the company can be considered an appropriate step or not. In this paper, SWOT and Porter’s five forces analyses will be applied to address the issues of location, target market, initial investment, and price strategy, as well as recommendations for the firm will be provided.
Description of the Company
In 2013, Ajay Shrestha, Nishant Pradhan, and Mahendra Gurung decided to set a coffee business in Nepal. They aimed to purchase the empty one-story building near the busiest street in the country’s capital – Kathmandu. The young entrepreneurs had an ambitious plan regarding the creation of a large cafes’ chain with the name Kaffeine. Each team member had an outstanding experience of how to make a business in Nepal, as well as valuable relationships that would foster the success of Kaffeine. However, despite the city’s fast-growing economy and increasing demand for coffee, the team had many points to consider and analyze to demonstrate significant performance in the future.
The Big Issue
Despite the fact that the business environment could give a number of benefits for the firm, there were some essential risks that could result in big problems. Starting from choosing an appropriate target market and a beans’ source and ending with initial investment – all the mentioned can be considered as a potential obstacle. The entrepreneurs aimed to be a part of the intensely competitive market with high barriers to entry, which is a risky decision itself. Nevertheless, the experience of the team and the other favorable conditions could be a good prerequisite for substantial profit margins. Thus, the big issue might be to analyze the market in an appropriate way to figure out all the current and potential risks, as well as to correlate investments with the needs of the company.
It should be claimed that the choice of the way a business environment will be analyzed is quite an important decision. A plethora of scholars have argued that the SWOT analysis remains a relevant tool and seems to be out of time (Phadermrodab et al., 2019; Buyukozkan & Ilicak, 2019). SWOT helps to identify many possible hinders for the business operations, as well as determine their strengths and opportunities. Hence, it might be rational to conduct this analysis within the scope of the conditions around Kaffeine and its founders.
One of the most vital strengths that are of a Kaffeine’s characteristic is the knowledge and experience of Shrestha, Pradhan, and Gurung. This experience might result in avoiding plenty of problems that young entrepreneurs face during their first steps in business (HWY Pro, 2017). Furthermore, the team has some essential relationships that could enhance the initial development of the company. Then, the location of the premises is another advantage – Kaffeine is to occur one block away from one of the busiest streets of Kathmandu – Durbar Marg.
It should also be mentioned that the mountainous terrain of Nepal fosters the process of producing top-quality coffee beans. The specific high-altitude environment of Nepal is an excellent condition for harvesting these beans. Although the quality may vary to a great extent among Nepalese coffee producers, thorough choosing and examining of the one could solve the issue. It is essential because the cooperation with national growers would result in lower prices for the product if compare with imported and branded ones.
Nevertheless, there is a number of considerable weaknesses in the framework of the business processes. The primary one is the low economic growth of the country as a whole – it may lead to unstable domestic demand and many troubles for entrepreneurship, such as high taxes. The other problem of the same tenor is subsistence farming, which is a big problem for growing coffee beans. Moreover, there is a lack of funding and electricity deficiencies in the country. It should be stated that the latter issue may be solved by purchasing an expensive generator, which does not seem to be a big problem. The entrepreneurs are ready to make a significant investment of Rs4,800,000 that will cover the expenses.
Kaffeine also has a number of opportunities that promise great potential for expansion. Nepal is located between two big economies – China and India – this might justify the stable export of coffee. Hence, the team can consider the option of profitable redistribution of coffee abroad. Furthermore, there was a substantial increase in domestic demand for coffee in Nepal since 2008. Such an opportunity might bring confidence to the entrepreneurs that their enterprise will gain notable profit margins in the long run. In the future, they may even import some branded coffee when Kaffeine will become a full-scale and recognized chain. However, initially, the latter action seems inappropriate as it will take too many unnecessary investments. It might be claimed that Kaffeine has plenty of opportunities that may allow expanding in further.
Finally, there are some threats that are to be taken into account by the young entrepreneurs. Keeping in mind that Nepal is located between India and China, it seems apparent that an exact extent of political tension might take place. For instance, in 1989, the was an economic blockade on Nepal undertaken by India (Bhattarai, 2015). Such conditions contributed to many problems of diverse character – starting from industrial and ending with social ones. This negatively affected Nepalese entrepreneurship and discouraged many enterprises from appearing.
Then, the coffee market of Nepal might be characterized as extremely competitive. Moreover, there are four established coffee locations near Kaffeine that are primary rivals of the firm. Among them, there is Himalayan Java Coffee that is a recognized and popular brand in Nepal. This corporation has the most substantial market presence and stands out against competitors. Such competition cannot be determined as monopolistic because Himalayan Java Coffee does not tend to affect prices and use its market power to force competitors out (Banton, 2019). However, the rivalry with the latter company will be the toughest one for Kaffeine, especially during the initial business stages.
To summarize, the SWOT analysis has indicated that setting the Kaffeine company is likely to result in mostly positive outcomes. All the discussed weaknesses and threats might be compensated by the fact that although there are low economic growth and hardships in Nepal, fast-developing Kathmandu is a perfect option for entrepreneurs. There is also the big actor that does not allow defining the market as perfectly competitive (Hayes, 2019). Nevertheless, the knowledge and experience of the team are to equalize the latter too.
Porter’s Five Forces Analysis
Porter’s five forces analysis has gained the reputation of an efficient instrument for assessing the external factors that affect a firm. It is quite a simple but sufficient tool for understanding the competitiveness of a company, considering essential aspects of the external environment (Mukherjee, 2018). An appropriate analysis results in the development of a sustainable and profitable strategy that may be a foundation of any firm’s performance. It seems reasonable to assume that the mentioned analysis is a proper instrument to assess the external circumstances of the Kaffeine company.
It is vital to know the extent to which the competition is tough in the market. The rivalry is intense – since the 2000s, there was a massive increase in coffee entrepreneurs in Nepal (Rauniyar & Burke, 2012). Additionally, Himalayan Java Coffee – the most powerful rival – is among the main competitors of Kaffeine as their cafes would be located quite close to each other. It should also be mentioned that there are three more rivals near Kaffeine that might be considered as notable actors, performance, and target market of which are to be taken into account.
It might be supposed that the supplier power is low as the company has a plethora of options to choose from – starting from domestic and ending with foreign suppliers. However, choosing the right coffee producer is a critical issue for Kaffeine. It seems rational not to spend additional costs for imported and branded beans as a domestic supplier may provide a high-quality product. The crucial point here is to choose a reliable producer as the quality varies significantly in Nepal.
The buyer power might be determined as moderate due to the following reasons. First, there are rivals to which customers can easily switch while choosing where to take a cup of coffee. On the other hand, there is a great number of customers due to the excellent location so that their flow is expected to be stable. Furthermore, the company aimed to target a relatively wide range of clients – business people, tourists, and students. Keeping in mind that Kaffeine would have a significant location, representatives of each group will inevitably visit the café. All the related costs for marketing and online presence seem justified – it is essential to lure and retain clients.
Threat of Substitution
The country’s culture may be characterized as the large coffee- and tea-drinking one. The threat of substitution is low, as coffee is a niche product in Nepal (Ethirajan, 2013). It allows assuming that it is pretty challenging to substitute or replace coffee from the Nepalese market. All companies with developed and sufficient business strategies, which are involved in the industry, have many opportunities to gain significant profits.
Threat of New Entry
Finally, barriers to entry are relatively high because there are an intense rivalry and the necessity for considerable initial investments. In order to enter the coffee market in Nepal, one has to deal with many threats and difficulties along the way. It is vital to conduct in-depth market research, identify an appropriate supplier, provide affordable and reasonable prices, and remain competitive in the long term. The listed factors require substantial resources and a unique business approach that is usually hard to create for unexperienced and young entrepreneurs. As mentioned above, the latter is not a characteristic of the Kaffeine team, which might lead to the determination and appropriacy of decisions.
As evident from the conducted SWOT and Porter’s five forces analyses, the decision on setting Kaffeine might be a good option for the young entrepreneurs. However, there are some identified issues that are to be solved. First of all, for the company, it might be better to cooperate with a domestic supplier to save on the beans’ costs considerably. It might require some additional expenses on examining whether a producer is reliable or not, but such an action seems rational in the long perspective. Then, although Kathmandu is a fast-developing city, a number of problems with electricity may occur due to the low economic growth of the country as a whole. This might ensure the stable and undisturbed operating of the café.
Furthermore, Kaffeine is to choose its main target market as there is a though competition. It will be too difficult and expensive to compete with such a giant as Himalayan Java Coffee that targets tourists and the upper-middle-class (Himalayan Java Coffee, n.d.). Thus, for Kaffeine, it seems reasonable to target students and tourists; the latter tend to visit the location constantly, so there will be enough customers for both Kaffeine and Himalayan Java Coffee. To meet the interests of this target group, the team might set a cozy atmosphere for studying and easy conversations, which could be its distinctive feature among rivals. It should be mentioned that targeting business people might not be a functional variant as they tend to pay much attention to a brand, which is costly for Kaffeine. The company might range its prices from Rs150 and Rs200 in case of cooperation with a domestic supplier. If the team would adhere to the latter approach, the initial investment of Rs4,800,000 seems to be enough.
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