In the contemporary business environment, more and more companies have chosen to form alliance for various strategic purposes. Strategic alliance can provide companies a variety of advantages such as facilitating the entry to a foreign market, sharing the risks between partners, and combining complementary capabilities of the partners etc (Pahl and Richter, 2008: pp10-12). This report would use Senseo as an example to identify the key success factors in the industry, to illustrate how Senseo’s competitiveness can be improved from strategic alliance, to evaluate the contribution of Uppsala model to the improvement of Senseo’s competitiveness, to identify the threats facing by Senseo, and to suggest what new markets Senseo could consider entering.
Key success factors in the industry
Firstly, innovation of product can be considered as a key success factor in the industry. For example, since the commercial espresso maker was invented in1946, the convenience brought by the coffee machines has created a significant market demand for the product. As a result, manufacturers have been kept innovating their products in response to the customers’ needs. Since Mr Coffee launched its innovative product which was equipped with automatic drip process, the demand for such products has been boosted in the market which makes Mr Coffee become a major player in today’s world market. It is obvious that the success of Mr Coffee in the industry is largely due to its innovative product. Secondly, affordable pricing is another key success factor in the industry. For example, the price of Senseo’s coffee pod machine was €75 when being initially launched to the market and the price dropped to €58 in 2009. As a result, almost one-third of Dutch households own a Senseo machine and Senseo has become the market leader in the industry. There is no doubt that Senseo’s competitive pricing strategy has made a significant contribution to Senseo’s leading position in the market.
Thirdly, flexibility is also a key success factor in the industry. One the one hand, the function of the coffee machine can be extended to other areas such as making tea or hot chocolate. This functional flexibility can allow the product being stretched to other market segments and increase the attractiveness of the product. On the other hand, it is important for the manufacturers to make sure their pods are compatible with the coffee machines of other manufacturers. This flexible compatibility is very crucial to the success of the products. For example, Melitta introduced its ‘MyCup’ coffee pod in 2004 which were not compatible with the coffee machines of the competitors so customers refused to buy these products. Consequently, Melitta had to withdraw this product from the market. Fourthly, high quality coffee pods is another significant success factor in the industry. Moreover, the quality of coffee pods can even be considered as a competitive advantage of the company. More specifically, the features of the coffee machine might be easily imitated by competitors but the unique taste of the coffee pod cannot be easily imitated. For example, the case suggests that the low cost followers from China cannot threat the market position of Senseo since Senseo does not merely compete on coffee machine but also compete on the coffee pods which especially designed for Senseo machine. More specifically, it is suggested that the main profits from Senseo come from the coffee pods rather than the coffee machine. This provides evidence that it is the quality of coffee pods rather than the cost of coffee machine which would contribute to the success of the company in the market.
Create competitiveness through strategic alliance
The competences represented in the Senseo concept are generated from the strategic alliance between Philips and Douwe Egberts. It is suggested that one of the advantages of strategic alliance is that it can bring together complementary skills and assets that neither company can easily develop on its own (Hill and Jones, 2009: pp273-274). In the case, Philips’ brand image as electronic expert together with the brand image of Douwe Egberts as coffee expert have added credibility to Senseo. The co-branding strategy can create international competitiveness for Senseo in the sense that customers would be more likely to accept the products of Senseo due to the belief that philips’ expertise in electronics and Douwe Egberts’ experience in coffee roasting would guarantee the quality of Senseo’s products. If Senseo is branded independently in the international markets, it would take a long time and cost a lot of money to raise the brand awareness of Senseo through advertising before customers would recognise and accept the products of Senseo. Through the co-branding strategy, an overall identity can be created to transparently link the coffee and appliances as part of lock-and-key system. This can help to build customer intimacy and the competitiveness of Senseo in the international markets will be increased due to the credibility added by Philips and Douwe Egberts.
Another benefit generated from the strategic alliance is the profit sharing between Philips and Douwe Egberts which can also be considered as a competence of Senseo (Hill and Jones, 2009: pp273-274). More specifically, the coffee machines provided by Philips might not be so profitable compared with the profit generated by the coffee pods provided by Douwe Egberts. As a result, Philips obtains a part of the profit generated by the sales of Senseo coffee pods as compensation and Senseo also gives a share of royalties in the Senseo coffee pods. Through profit sharing, Senseo is able to reduce the price of its coffee machine products and consequently improve the competitiveness of the product (Witteloostuijn, 1995: pp88). This competitive pricing strategy can allow Senseo to penetrate international markets quickly and eliminate independent competitors which do not have any form of strategic alliance with others. In this sense, the competence of Senseo which developed from profit sharing would increase its competitiveness in the international market.
The innovative capability represented in the Senseo concept can also create international competitiveness for the company. More specifically, both partners of Senseo, Philips and Senseo, have strong innovative capability and abundant expertise in their own areas including electronics and coffee brewing process. Such innovative capability is very crucial for Senseo to continuously improve its products by modifying or adding features to the products in response to the changing customer needs. In the international markets, customers from different background would have different preferences in terms of the products. As a result, the ability for innovation is the key determinant of a company’s competitiveness (Terziovski, 2007: pp81). In this sense, it is believed that Senseo’s innovative capability can increase its international competitiveness.
The contribution of Uppsala model to Senseo’s competitiveness
The Uppsala model of internationalisation suggests that a firm should start internationalisation by exporting and develop incrementally by committing more resources to the foreign markets through establishing sales subsidiaries in the markets and ultimately establishing production facility in foreign markets (Johnson and Turner, 2010: pp237-238). The basic idea of the Uppsala model is that a firm should take advantage of exporting activities to develop the knowledge of the foreign markets gradually so as to decide whether it is worthwhile to commit further resources to the foreign markets. This learning process for the foreign markets is aimed to overcome the psychic distance between home country and foreign markets and increase the company’s international competitiveness (Muller and Chuong, 2010: pp51). This Uppsala model can also be applied to Senseo’s case to help it increase its international competitiveness.
In the case, it is suggested that the market volume for coffee machine vary significantly between regions. Even in the Western European region, there are significant differences exist among different national markets. This suggests that in order for a product to be successful in a foreign market, it is necessary to develop a set of specially designed international marketing strategies to serve the targeted foreign markets. Senseo should take these implications from Uppsala model into account and use it to increase the international competitiveness. For example, when Senseo is planning to enter a foreign market, it should try to export a small amount of products to the foreign markets. The purpose is not to make profits on the exporting activities but to get feedbacks in terms of the market condition and customer needs. Based on this information, Senseo can determine whether it is worthwhile to commit more resources to the market. If the foreign market is worth to be further explored then it can modify the marketing strategies based on the feedback from the exporting activities and establish sales unit in the foreign markets to get more in-depth market information. Meantime, Senseo should continuously modify the marketing strategies according to the information collected by the sales unit. If the foreign market is believed to be highly valuable with huge growth opportunities then Senseo can consider committing more resources to the market by launching production facilities. Through this way, the risk of wasting organisational resources in the inappropriate foreign market can be minimised. On the other hand, the modified marketing strategy for the targeted foreign market can increase the international competiveness of the company.
The threats facing by Senseo in the future sales of its product concept
The main competitive advantages of Senseo are generated from the strategic alliance between Philips and Douwe Egberts. Moreover, these competitive advantages have contributed to the success of Senseo in the global markets. However, there are many other strong competitors can form the similar strategic alliance and threat the market position of Senseo accordingly. On the other hand, it cannot be taken for granted that the strategic alliance between Philips and Douwe Egberts would be maintained in the future. This is because there are a lot of uncertainties in a relationship of strategic alliance such as disagreement in terms of Senseo’s strategy, the distribution of profits, and the power of control over Senseo. That is to say, the possibility of breaking the strategic alliance in the future will be a potential threat for Senseo.
Since Douwe Egberts has failed to be given legal protection of its coffee pods, many competitors have copied its coffee pods as well as coffee machine. This has intensified the market competition and threatened Senseo’s future sales of its product concept. As a result, Senseo has to explore other sources of competitive advantages in order to improve its competitiveness in the market. In addition, the increasing role of private labelling in coffee pods can also be considered as a threat to Senseo in the future sales of its product concept. More specifically, the private labelled coffee pods are empowered with low pricing strategy which is very attractive to customers. This would explain why the private labels have accounted for over 45% share of retail volume sales in the German market in 2008. On the other hand, the success of private labelled coffee pods is also partly due to the increasing quality of the product. For example, in the German market, the quality of low cost retailer Aldi’s coffee pods are considered as superior to those more premium and more expensive branded products. The low price together with the high quality of the private labelled coffee pods has restructured the market significantly and they will continue to threat companies such as Senseo in the future since Senseo does not possess any competitive advantage over private labelled products. Moreover, it is very difficult for Senseo to defend the attack from private labelled products. For example, Senseo cannot get involved in a price war with private labels since this would damage the brand image of Senseo. Also, due to the loss of legal protection of the patent of its coffee pods, it is not wise for Senseo to innovate new products with more advanced benefits since competitors can easily copy such newly developed products. As a result, Senseo would face a real challenge from private labels in the future.
Relevant new markets for Senseo to enter
In order to achieve further growth in the global market, Senseo must consider expanding to new markets. As suggested by the Uppsala model, it is rational for Senseo to consider entering the markets which are geographically close to the home country of Senseo (Borghoff, 2005: pp114). This is because the geographical distance between the two markets would imply the degree of psychic distance and cultural distance. Senseo should firstly enter those markets with low level of psychic distance and cultural distance (Margardt, 2009: pp22). This is due to the fact that small country differences would allow Senseo to apply its existing successful set of marketing strategies to the new markets. Since Senseo is formed by two parent companies which are originated in Netherlands, it is suggested that Senseo could considered entering the markets in Western Europe. Moreover, as Senseo has already expanded to a number of countries in Western Europe, its experience developed from operating in these markets would be very beneficial for the company to enter other countries in Western Europe. As a result, those new markets in Western Europe are considered as most relevant and most appropriate for Senseo to enter.
Although minimum psychic distance and culture distance are perceived when choosing to expand to the Western Europe markets, they might not be the perfect choice for Senseo to consider. More specifically, according to the case, the Western Europe market ranked second in terms of the retail volume for the global market of coffee machine in 2008. This suggests that the Western Europe market might be very saturated with limited growth rate. As a result, Senseo could consider expanding to the markets in Eastern Europe since those markets are almost unexploited. In addition, since Senseo is originated from Netherlands which is located in Europe, there would be little psychic distance and culture differences exist which makes it easy for Senseo to predict the market conditions, culture value, consumer behaviour, and specific needs of the local customers so as to develop relevant products as well as most suitable marketing strategies to facilitate the expansion into the markets in Eastern Europe.
Besides, it is suggested that Senseo could also consider entering new markets in North America. This is because the North America markets are growing rapidly and they will continue to grow in the future since customers in those developed countries such as U.S have a lot of disposable income which can sustain the market demand. In addition, it is suggested that the single serve brewing concept is still in its early stage in North America markets while their retail volume for the global market of coffee machine has ranked first in 2008. This provides evidences that the North America markets have a huge potential for growth and it is worthwhile for Senseo to further develop the presence in new markets in North America. However, due to the psychic distance and culture difference between Western Europe markets and North America markets, Senseo cannot simply replicate its existing product range or the marketing strategies for entering the new markets in North America. Rather, Senseo has to conduct thorough marketing research to collect enough information about the market so as to facilitate the market expansion by applying modified marketing strategies.
In conclusion, the key success factors in the industry are the innovation of product, affordable pricing, and flexibility. It is identified that senseo’s competitiveness has been improved from the strategic alliance through combining the complementary abilities of the two partners, profit sharing, and innovative capability. The contribution of Uppsala model to the improvement of Senseo’s competitiveness has been clarified. It is found that Uppsala model would help Senseo enter the foreign markets incrementally and make the company continuously modifying its strategies in order to meet the specific requirements of the local customers thus improving its competitiveness. In addition, it is suggested that the imitation of competitors, no legal patent protection, and growing market share of private labels are the main threats facing by Senseo. Finally, it is suggested that Senseo could consider enter new markets either in Europe or North America.
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