Introduction
For the last one decade, Senseo has been an important contributor to the coffee appliances business. The company breakthrough in coffee pod machine has enabled consumers to make quality coffee faster than before (Hollensen, 2010, p.140). Small size and ease of use from Senseo system helps in making the necessary coffee cup. Many households today rely on Senseo automated coffee pod machine.
The company highlights the coffee pod machine and coffee pods as the ensuing unique value adds in the current global market. These are products that can rapidly obtain, analyze and take action on real-time data inputs.
For the products such as coffee pods, Senseo is a market leader in many European countries while it also serves other foreign markets in America continent. The uncertainties associated with each market are different and part of the Senseo story. The constant adaptation of products and business strategies are defining features of Senseo as a business.
This is an important accomplishment of the firm especially when it comes to international expansion. The stiff competition in the global coffee market suggests the need for strategic entry into foreign markets in order to increase the market share (Hollensen, 2010, p.142).
Beginning with the development of the patented coffee machine and brewing process in 2001 and extending to Senseo one-of-a-kind coffee ponds, international marketing initiatives have been considered by Senseo as the key to business success.
The international alliance between Philips and Douwe Egberts is not just incremental gain but performance gain of an order of magnitude. Concurrently, Senseo has long invested in international market expansion which is another imperative part of this case.
Senseo is the result of the partnership between electronics expert Philips and coffee roaster Douwe Egberts both of which have a degree of autonomy (Hollensen, 2010, p.139). Royal Philips Electronics is based in Netherlands while Douwe Egberts is based in Denmark.
Both of these firms have expanded internationally with substantial brand recognition across the world. This case study is focused on the competitive advantage created through this alliance and the spirit of expansion is reflected in the performance of Senseo in presence of determined competitors.
Global market environment
The global coffee products market is becoming increasingly saturated. This is because of the increasing number of companies which are venturing into the industry. One of the factors that are contributing to this rapid growth is the increasing distribution of me-too products. This section gives a comprehensive of the coffee products market environment through PEST analysis.
PEST analysis
Political factors
In order for Senseo to operate in the international market, it went through an important strategic alliance. This process of partnering exposed the company to various political factors across different economies. Government stability is a major factor that affects the company business.
According to Cavusgil et al (2009), firms intending to enter new market encounter country risks including political risk which refers to the stability of the target country government. Expansion to these markets put the company under these political risks.
The success of Senseo in many European countries can be attributed to the political stability of these countries. Thus the firm should reconsider this issue when entering emerging markets in future.
In addition, governmental trade laws and regulation are key factors influencing Senseo international business. Between 2001 and 2007, the company success was accelerated by the patented pod machine (Hollensen, 2010, p.141). However, the ccompany has to cope with new environments where such laws do not apply.
There are also different intellectual property rights within these environments though Senseo can take the advantage of the alliance as the basis to mitigate any risk associated. Export laws affect the business in that Douwe Egberts has to abide with such legal requirements when exporting the coffee used to make coffee pods.
Economic
The potential markets for Senseo products include the developed and emerging markets. In fact, the economic situation in the European countries where the company operates in terms of monetary issues is a major factor that drives Senseo.
The economic trends in home countries of the partners have also impacted on the business significantly. For instance, it has been reported that one third of the Dutch households own a Senseo machine and the number is expected to increase (Hollensen, 2010, p.140). This is partly because the country is economically stable and individual income is relatively high.
Moreover, the fact that Senseo is operating in emerging markets such as the Chinese market suggests the influence of economic factors in these economies. According to Fedorova and Vaihekoski (2009), the major sources of risks in emerging markets are market segmentation and fluctuations in exchange rates (p.6).
Single serve brewing concept is expected to impact most developing markets where disposable income has not reached sustainable level (Hollensen, 2010, p.138). Therefore, the economic growth in these markets will be a key driver of Senseo business in future.
Socio-cultural factors
International business are affected by changes in social environment either positively or negatively (Baron, 2005, p.207). Senseo operates in several markets with varying social and cultural preferences. Cavusgil et al (2009) connote that cross cultural risk is a key challenge for internationalizing firms.
The fact that European consumers have a special attachment to coffee is a major drive for success in the industry. Coffee is consumed daily by all members in a typical European family. Essentially, the international growth of Senseo can be directly related to increasing demand of a faster way to make a cup of coffee.
Furthermore, the population has been increasing throughout the decade leading to increase in coffee consumption (De Mooij, 2010, p.71). The new generation is looking for the easiest and convenient lifestyle thus embracing new technologies with both hands. For Senseo and other coffee pod machine marketers, this group forms the largest segment.
Indeed, the typical owner of such a machine is 40 years or below suggesting the significance of the younger generations (Hollensen, 2010, p.140). Therefore, it appears that the high birth rates in potential markets are a factor that can influence the industry as long as it meets the expected lifestyle standards.
Technological factors
In the last one decade the world has experienced massive technological developments. These changes have been part of the success factors for Senseo. Senseo coffee pod machine is a technological breakthrough that has built consumer intimacy. The company has also sort to differentiate the products through the adoption of new technologies for their products as reflected in the new model machine.
Competitors such as Nestle and Melitta Unternehmensgruppe Bents KG have continued to introduce new machines with added technological features. Thus, the competition is somehow based on the technological capability of individual firms.
Strategic fit analysis
The market environment indicates that Senseo is faced by a number of opportunities and challenges. For instance, the analysis shows that there is a high probability of the company experiencing an increment in the intensity of competition. On the other hand, economic stability and growth coupled with social trends represents an opportunity for Senseo to increase market share and profitability.
The high rate of technological innovation presents an opportunity for Senseo to improve the competitive advantage through production of faster and high quality coffee pod machines. However, this is achieved when the company focuses on the core competencies and strengths to exploit the emerging opportunities while converting the weaknesses into strengths (Spence & Kale, 2011).
Core competencies
According to Hitt, Ireland and Hoskisson (2011), firms’ core competencies refer to the capabilities that form the accruing source of competitive advantage (p.82).
Johnson, Scholes and Whittington (2008) are of the opinion that for a company capability to be considered as a core competency, it should be inimitable, unique, non-substitutable and valuable (p.4). In all operations, Senseo has managed to create a number of core competencies.
First, Senseo has developed strong brands that have successfully penetrated the international market. The company has achieved this by forming a strategic business alliance with two important firms. The strong brand is accompanied by the strong brands of individual companies that form the alliance.
As noted, creating an overall identity that transparently links coffee and appliance as part of single system and building consumer intimacy around this was the crucial building block to success (Hollensen, 2010, p.140). Secondly, Senseo has built a strong management team to suit the internationalization strategy.
As Cavusgil et al (2008) noted the fundamental challenge facing the organizations entering international markets is centered on solving managerial problems in these markets (p.5). Thus, the success of the company is directly connected to good management. Furthermore, the key people involved in managing such an alliance must have the personal skills to make it a success.
SWOT analysis
Strength
To survive in the international market, it is vital to build a competitive advantage (Harrison & John, 2009, p.61). Among the ways through which a firm can achieve this is by improving important strengths. In business operations Senseo has developed a strong brand image due to the effectiveness in designing and producing high quality coffee pod machines.
The company has invested heavily on R&D such that they produce new products ahead of market competitors. With characteristics of a strategic asset-seeking investment, Senseo has been able to promote long-term goals by reaping the advantages of the two partners (Dunning & Lundan, 2008, p.73).
The implementation of effective technology enables the company to produce high quality products. This satisfies the needs and wants of the consumers in the target markets especially those in European and American countries.
Weaknesses
The major weakness for Senseo is the narrowed focus on Eastern Europe markets. Cavusgil et al (2009) highlight the importance of market research before a firm decides to enter foreign market.
But, Senseo demonstrates failure in this respect as their target market is primarily European countries while other countries could promise better performance. In addition, Senseo has very few products in their portfolio which suggests limited market segments. Coffee appliances are many and the company should attempt to widen the product portfolio and probably enhance their competitive advantage.
Opportunities
The social changes being experienced in many countries present an opportunity to Senseo. For instance, the growth in population presents an opportunity for the company to increase the current customer base. In addition, the economic growth in some countries is an opening to new markets.
Emerging markets are said to offer greater market development opportunities than those in developed countries but with the offer of higher returns comes higher risks (Cavusgil et al, 2008).
The high rate of technological innovation also presents an opportunity for Senseo to enhance global competitiveness. This arises from the fact that the company will be able to develop high quality coffee pod machines (Economist Intelligence Unit Limited, 2009, p.10).
Threats
Senseo faces intense competition from other multinational companies such as Nestle, Melitta, Tchibo and Aldi (Varga, 2010, p.5). The future success of the firm is threatened by the fact that these companies are also diversifying their products. Therefore, consumer bargaining power in international markets is increasing due to the wide range of products available for them.
In addition, Senseo is threatened by low-cost followers from china who must enter the industry in future (Tsui & Lau, 2002). In as much as the firm differentiates through the alliance, the low cost followers will never be discouraged as long as new technologies are in place.
There could be the fear of the followers developing cheap coffee pod machines that consumers would consider to be better. More interesting is that the followers begin by entering the emerging markets on their way up while Senseo approach these markets from the top. Therefore, the firm is threatened by saturated markets in those emerging markets if the foreign investment comes at a later stage.
Creating international competitiveness through core competences
Product development has been a long-term priority for Senseo. When the company focused on coffee products to support market entry it needed to create value to customer through innovation and high quality products. In 2001 the company developed the first coffee pod machine that was geared towards the use of coffee pods produced by Douwe Egberts (Hollensen, 2010, p.140).
As the machine was patented, Senseo was able to increase the market share due to the high demand of the product. Indeed, the company was able to sell more than 15 million coffee machines and more than 8 billion coffee pods in the first seven years (Hollensen, 2010, p.140).
According to Uppsala model, the company gradually increased and intensified activities in neighboring markets as the demand increased. By mid-2007 it was estimated that the company sold over five million coffee pod machines in Germany.
Currently, Senseo business depends on innovation as patents were revoked in many market environments. Competitors keep on bringing new products into the market thus forcing the company to heavily invest on R&D.
In 2007 the company launched a new model-the Senseo New Generation-with novel mechanism to accommodate larger cups and new features including insufficient water indicators, larger water reservoir and options allowing users to adjust water quantity (Hollensen, 2010, p.142).
This breakthrough is a result of the strategic alliance that enables the company to control the development of both coffee pod machines and the coffee pods.
The success of a strategic alliance depends on the benefits perceived by each partner especially if their brands are already recognized. In this regard, Senseo had to leverage the equity in the partnering brands in order to give credibility to the new brand (Hollensen, 2010, p.141).
While competition may lead to adverse factors like reduced prices of the products, a partnership can succeed by relying on mutual performance (Wallace, 2001, p.859). For instance, when the prices of coffee pod machines went below production costs Senseo continues to succeed as the losses in machine sales are compensated by the profits from coffee sales.
Internationalization
Hollensen (2010) identifies three models that can define how organizations enter foreign markets namely network, transaction cost and Uppsala models. These models may depend on factors like the type of business; the nature of target markets; the position of the firm in terms of resources; and the corporation motive to include others.
Network model is where the supplier develops a good relationship with the buyer and internationalizes in order to service the customer better from another location while depending on resources controlled by other firms. Transaction cost theory is when a firm enters a foreign market and creates activities internally instead of outsourcing especially through exports or foreign direct investment (Dunning & Lundan, 2008, p.70).
Uppsala model is about how firms gradually increase and intensify their activities in foreign markets by first gaining experience from home markets before proceeding to international markets.
From the analysis of Senseo case study, it is evident that the entry strategy to foreign markets can be explained through Uppsala model. The initial market for the firm was the Scandinavian countries where the partners came from. As the demand for coffee pod machines increased in the neighboring markets of France and Germany, the firm would enter the markets.
This is reflected in the market being concentrated within the Western part of Europe. Certainly, the single serve brewing concept has proved successful in Europe and the trend is still in the early stages in the U.S. and is yet to impact on developing countries (Hollensen 2010, p.138). In this respect, it would be worth to suggest that transaction cost model for internationalization would serve Senseo business better.
This is because the company is well established and has vast resources that can be used to extend assumed business in other potential markets through Foreign Direct Investment (FDI).
According to Cavusgil et al (2008), the fundamental challenge facing the firms entering international markets centers on solving managerial problems in these markets (p.5). But Senseo managers have proved to be competent enough such that they can be able to make effective decisions about how to mitigate the risks associated with Internationalization.
In addition, there are many opportunities in the markets that the company is slack in operation. The American market is the largest in terms of coffee consumption while the Asian emerging markets have opportunities related to economic growth. As Dunning and Lundan (2008) connote, the company should engage market-seeking investment in order to exploit new market besides sustaining the existing one (p.70).
In fact, competition in coffee pods machines is concentrated in European countries and moving away from these markets would suggest low competition. Therefore, Senseo should consider entering the emerging markets such as China, India and Brazil. While the developed markets are threatened by saturation, the emerging markets lack branded firms that offer coffee pod machines as well as the coffee pods and capsules.
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