Aloha Case Essay

1. What should be Aloha’s competitive strategy? Low cost? It is difficult for Aloha to compete with the industry giants like Nestle, P&G and Phillips Morris on low cost. The reason is simple – volume. These industry giants have much higher volume than Aloha and enjoy a tremendous advantage in economies of scale. It is probably suicidal for Aloha to try to adopt a low cost strategy. It will probably be crushed like an ant, unless the giants play â€Å"oligopolists† and charge high prices to maximize profits. Differentiation; i.e., selling gourmet coffee a la. Starbuck? It is probably easier for Aloha to position itself as a gourmet coffee maker, catering to the yuppie type and charging a premium price for a coffee experience different from that offered by â€Å"regular† brands. Differentiation seems to be the choice strategy for small companies in that its success does not rely on size or volume; anyone with little resources but a great idea can be the David that slays the industry Goliaths. Examples abound: Ben & Jerry in ice cream and Paul Newman in spaghetti source. In fact, while the case tells us little in this regard, I suspect that Aloha has been able to survive in this competitive industry for all these years and seems to be thriving entirely because it started out occupying a special market niche and positioning its coffee as a gourmet brand. 2. How should the roasting plants, and marketing and purchasing departments be evaluated? Roasting Plants Given the differentiation strategy, the roasting plants should be treated as a profit center, as it is already now. That is because the differentiation strategy can be successfully implemented only if the quality of the coffee lives up to its image as a gourmet brand, and evaluating plant managers on profit, rather on cost alone, motivates the managers to constantly improve the quality of the coffee and maintain it at high levels. In contrast with plant managers evaluated on cost alone, plant managers evaluated on profit are penalized if they sacrifice quality on the altar of cost minimization; when quality declines, so will revenue and profit. On the other hand, if Aloha pursues a low cost strategy, then the plant managers should be evaluated on cost control alone. For a firm adopting a low cost strategy, volume is the king in order to achieve economies of scale and the customers targeted are less conscious of the quality of the coffee brands they drink. Thus, keeping cost down would be the primary objective for the plant managers. Marketing Department Since Aloha positions itself as a gourmet coffee maker, the objective for the marketing department is to keep both the price and gross margins high. Volume would not be very important as the firm knows that it only appeals to a limited group of coffee connoisseurs. Thus, the marketing department should be treated as a revenue center and annual evaluation of its performance should be based on a comparison of actual prices with target prices. Alternatively, marketing could be treated as a â€Å"pseudo† profit center with its â€Å"profit† defined as sales minus standard cost of coffee sold. If a low cost strategy is pursued, then the marketing department should be treated as a revenue center as well. But the focus now is on volume, or more precisely, volume growth. Thus, the marketing manager and his lieutenants should be constantly reminded of the importance of sales growth over time and be rewarded for good sales growth. Purchasing Department The purchasing department currently purchases coffee on both the spot and forwards markets. The policy is to make purchase commitments (forward contracts) based on maximum potential plant requirements and sell the rest on the spot market. That sounds like speculation. One may argue Aloha should meet its need for coffee beans only on the spot market and refrain from the speculation business, which is distracting attention from is main business – grinding and selling gourmet coffee. A counter argument is that good coffee traders probably can spot market trends others cannot and are able to reduce the cost of coffee beans by purchasing forward contracts. I question that argument because it is doubtful that any market participants can â€Å"beat the market† and consistently purchase coffee beans on the forwards market at a lower cost than on the spot market. One drawback of the policy of buying forward contracts is it allows the purchasing department to transfer the most costly coffee beans to the plants and make the plants shoulder losses from their trading mistakes. Buying on the spot markets means that the purchased amount is equal to the need of the plants for coffee beans, and thus the purchasing department would not be able to burden the plants with high-cost beans and keep low-cost beans for themselves to boost trading profit. If the purchasing department is forbidden to play the forwards market, performance evaluation for the department is easy. It would be treated as a cost center, and the cost it incurs for coffee bean purchases will be compared with market price averages in the periods that the purchases take place.