Business Policies For Break Even Calculation: Strategies And Analysis

Michael Porter’s five forces

This report concerns with the development of a proper marketing and strategic positioning strategy for Expresso Expresso. This cafe has been catering the students as well as the faculties of University of Alabama as the cafe is located just across the street of the university. The owner is concerned with the rise in the level of competition and therefore has been looking to change the dynamics and thereby expanding their business. This report will therefore look create an idea to the owner whether his idea and concept will be ideal in expanding the business and maintain competitive edge.    

Industry rivalry – Dynamics of industry rivalry within coffee industry dramatically changed since the year 1987. Whereas in the early days Starbuck was the main competitor at present various small coffee retailers are also providing specialty coffee that are giving tough competition. Apart from Starbucks, McDonald’s fast food chain is another biggest rivalry. Hence, the industry rivalry forces generated through competition is very high (Dobbs, 2014).

Potential of new entrants – Barriers to the entry in coffee industry have substantially increased over the past few years. As a result, potential threat for new entrants has declined. However, as the initial requirement of capital for coffee shops are small, potential of entering the small coffee shops are still there.

Substitute products – Primary substitute for coffee is carbonated soft drinks. However, the health concerned people are now considering coffee over carbonated soft drinks and as per new evidence coffee is considered as comparatively healthy drink.

Bargaining power of supplier – If the bargaining power of the supplier is compared with previous years it can be stated that the supplier’s bargaining power has been increased. Increased unity among coffee farmers is another major factor in increasing their bargaining power (Indiatsy et al., 2014).

Buyer’s bargaining power – Buyers are in the better position now to assure that they will pay the favourable price and in exchange they will receive appropriate quality product. Bargaining power of buyer has been increased due to availability of various coffee shops and information regarding the market variables.

Various business strategies adopted by Todd Sylvester are mentioned below –

Apart from the traditional coffee drinks his shop also deals in selling smoothies, teas and some varieties of the pastries. Further, instead of serving the prepared foods Todd prefers to deliver freshly prepared food after receiving the order.

Instead of offering buyer card or one free cup of coffee on ordering nine cups, Todd offers flat 10% discount that is straighter and does not pit any burden on the buyer to buy specific quantity to avail the free offer (Burns & Dewhurst, 2016).

Todd wanted his customers to make feel comfortable and values the importance of speed and convenience particularly when the customers were ordering the coffee before go to work. Hence, he placed the priority while completing orders for drive – through quickly. Though completing the orders in faster way is not a big deal for its competitors Krispy Kreme and Mc Donald, it is quite challenging for EE as the drinks it serves are made-to-order.

Generic business strategy of Expresso Espresso

All the above strategies of Todd regarding his business is seem to be correct for the below mentioned reasons –

As it deals in various other products like smoothies, teas and some varieties of the pastries it will attract more customers as it will not only attract the coffee drinker but also the tea drinker, smoothies drinkers and the customers who prefer to have something like pastries will visit EE.

Offering flat 10% discount will be more preferable for the customers against buyer card or offer of one cup free coffee on order of 9 cups of coffee. The reason behind this is that they are not obliged to order specific quantity to avail the offer. Further, the buyer card may be lost before availing any offer or next time the customer visit the coffee shop. Hence, offering flat discount is better against other options (Bull et al., 2016).

Though serving the drive through customers is time consuming it gives the store differentiating factor and 40% of total revenues of EE generated through serving the drive through.

Todd does not believe in becoming the tyrannical boss and created family environment in the shop. He further allows his employees chatting with the friends who visits the shop during work hours and hung out during their off hours. Hence, Todd follows Laissez-faire style of management where the leader has limited input on day to day decision making approach on day to day basis and the employees are provided with the freedom regarding whatever they think are best (Fazzini, 2018).

His values are expected to provide advantages to EE as the employees will feel strong sense of the responsibility towards the company as well as towards other employees. Further, it will make the employees happy in working EE which in turn will lead to higher level of efficiency.

Strengths	Weaknesses
Deliver coffee based on make – to – order Offers various other products like smoothies, teas and some varieties of the pastries apart from coffee Offer 10% flat discount	Does not serve the customers after 11 pm and asks the customers to leave at that time  Most of the products are of generalized standards High point for the prices (Bull et al., 2016)
Opportunities	Threats
Provides family like environment to the employees that will increase the efficiencies Socially responsible attitude	Movement of independent coffee houses Increase of competition involving the sellers of low cost coffee.

From the analysis of profit and loss account of the company it is identified that sales as well as the gross profit of the company for the last 3 months that is over March 2006 to May 2006 was in increasing trend. However, due to high operational expenses the business could not generate any positive income in any of the months (Williams & Dobelman, 2017). Further, from the balance sheet of the company over the period of February 2006 to May 2006 it has been found that current assets of the company were sufficient to pay off its current obligations. Further, the company was lower leveraged as its outside borrowing is comparatively lower than the own equity (Ives, 2015). 

It can be stated that EE requires selling 3,214 numbers of products for covering its fixed as well as variable costs and after that point only the company will start earning the profit.

The recommended changes that can be incorporated in the marketing strategies can be discussed with the help of the 4 Ps.

It is seen that with respect to price, it is essential that the prices of the products need to be reasonable so that it becomes easier for various sectors of people to come to the shop and purchase their product.

In accordance to product, it is essential that several kinds of products are presented to their customers so that they are satisfied with the products and accordingly their level of sales would increase.

By looking into the aspect of place, Expresso Expresso needs to establish their shop in areas where the extent of customers will be high so that their level of expense towards advertisement and promotion gets reduced.

Promotion is even an essential aspect for any enterprise and therefore the cafe needs to promote their products and services by providing happy hours to their customers where there would be discounts and other attractive offers which would attract more customers.  

It is expected that concentrating on other sectors of customers will increase the sales by 75%. However, as the COGS of the company is too high that is 58% and the operating expenses are fixed, it will only reduce the loss margin from 62.65% to 17.80%. However, it will not be able to generate profit for the company.

As Todd is not able to generate positive earnings from the business as its major customers are from university students only, it shall expand to other location that will increase the sales level. However, it is expected that the additional sales will override the risk from loss of market share. 

Reference 

Bull, J. W., Jobstvogt, N., Böhnke-Henrichs, A., Mascarenhas, A., Sitas, N., Baulcomb, C., … & Carter-Silk, E. (2016). Strengths, Weaknesses, Opportunities and Threats: A SWOT analysis of the ecosystem services framework. Ecosystem Services, 17, 99-111.

Burns, P., & Dewhurst, J. (Eds.). (2016). Small business and entrepreneurship. Macmillan International Higher Education.

Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), 32-45.

Fazzini, M. (2018). Financial Statement Analysis. In Business Valuation (pp. 39-76). Palgrave Macmillan, Cham.

Indiatsy, C. M., Mwangi, M. S., Mandere, E. N., Bichanga, J. M., & George, G. E. (2014). The application of Porter’s five forces model on organization performance: A case of cooperative bank of Kenya Ltd. European Journal of Business and Management, 6(16), 75-85.

Ives, M. (2015). Financial Statement Analysis. In Encyclopedia of Public Administration and Public Policy-5 Volume Set (pp. 1-7). Routledge.

Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book Chapters, 109-169.