Innocent smoothie strategic management PDF

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Strategic management of innocent smoothie ...

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A STRATEGIC ANALYSIS OF INNOCENT DRINKS BY: 200887565 AND 200884396

ULMS353: Strategic Management and Business Policy May 2016 Word Count: 2929

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Table of Content

1.0 EXECUTIVE SUMMARY..................................................................................................3 2.0 INTRODUCTION............................................................................................................4 3.0 INTERNAL ENVIRONMENT ANALYSIS.............................................................................5 3.1 RESOURCES AND CAPABILITIES ANALYSIS..........................................................5 3.2 VRIO COMPETITIVE ADVANTAGE TEST...............................................................6 3.3 SUMMARY OF INTERNAL STRENGTHS AND WEAKNESSES................................10 4.0 EXTERNAL ENVIRONMENT ANALYSIS..........................................................................11 4.1 PESTEL FRAMEWORK.......................................................................................11 4.2 PORTER’S FIVE FORCES ANALYSIS.....................................................................14 4.3 COMPETITOR ANALYSIS...................................................................................16 4.4 BOWMAN’S STRATEGY CLOCK.........................................................................17 4.5 INDUSTRY KEY SUCCESS FACTORS....................................................................18 5.0 SWOT ANALYSIS..........................................................................................................19 6.0 TOWS MATRIX............................................................................................................20 7.0 ANSOFF Matrix...........................................................................................................22 8.0 SAFE CRITERIA............................................................................................................23 9.0 CONCLUSION..............................................................................................................24 10.0 REFERENCES.............................................................................................................25

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1.0 EXECUTIVE SUMMARY This report provides a strategic analysis of Innocent Drinks’ internal and external environment, highlighting their strength and weaknesses as well as identifying future trends that will affect them. The internal analysis identifies Innocent’s current resources and the capability each resource can bring to the organisation. The capabilities are assessed using the VRIO test, which discovers whether Innocent can maintain a competitive advantage using said capabilities. The test suggests only three could provide temporary competitive advantage, the employee culture, the strong CSR reputation and the access to large capital. Despite these strengths, it is evident Innocent faces several weaknesses. Through analysis, the key weaknesses identified are the continued loss of customer loyalty due to the increase in Coca Cola’s investment, the high product prices and finally, that their strong company and employee culture could ultimately constrain future strategic plans.

The analysis of the external environment highlights Innocent Drinks as an industry leader, with a largest share of the market and positive sustainability and ethical values that have aided them in achieving brand loyalty. Despite their successful position, the analysis identifies that the UK smoothie market is predicted to decline by 2020 and that consumers are becoming increasingly aware of the high sugar content in fruit drinks.

This report proposes four possible strategic options and the most beneficial strategy for Innocent is a market penetration strategy. This strategy involves moving production and manufacturing to Europe, a market they already operate in. Although initially costly, this will allow Innocent to pursue further growth in a market they have experience within, whilst obtaining knowledge on local consumer preferences and thus avoiding export costs. This strategy will be beneficial to Innocent as their main UK smoothie market is predicted to decline.

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2.0 INTRODUCTION Innocent Drinks was established in 1999 and is a British, high-end, fruit juice and smoothie beverage manufacturer. Innocent’s target market consists of young to middle-aged, upperclass, women (18-50) who are health conscious and seek health benefits and great taste in one product (Kinetic, 2016). They mainly operate within Europe with smoothies being their primary product. Since Coca-Cola acquired Innocent Drinks in 2009 (Innocent Drinks, 2016), the company has become a smoothie market leader in the UK and by 2012, Innocent had increased sales dramatically by over 35% compared to the previous year (Reynolds, 2013). They now have a strong presence in fifteen countries in Europe since their initial investment in 2013.

The company strives to do business in a “more enlightened way” (Innocent Drinks, 2016) and currently follow a ‘sustainable and ethical’ product differentiation strategy. This is shown through the company’s claim to take responsibility for the impact their business has on the environment and make the impact as positive as possible. They attempt to achieve this through being sustainable, by using ethically sourced ingredients whilst still being nutritional, using recycled packaging and even giving 10% of profits back to charity. This adheres to Innocent’s company values to be:

 Natural  Generous  Commercial  Entrepreneurial  Responsible (Innocent Drinks, 2016)

Despite Innocent’s success in the UK smoothie market, the market is becoming saturated, with the prediction that it will decline by 2020. The issue of high sugar content in fruit drinks is also becoming more of public concern amongst UK consumers. This is important as consumer’s smoothie preferences may change to find healthier alternatives such as raw 4

juices or ‘DIY’ drinks such as, making juices at home. This will be a challenge for Innocent with their main product being smoothies as it may be a long-term risk for them to rely on this sole product. The current challenges discovered have led us to propose a 5 year strategy involving market penetration, which will allow Innocent to achieve further growth in European smoothie markets.

3.0 INTERNAL ENVIRONMENT ANALYSIS 3.1 RESOURCES AND CAPABILITIES ANALYSIS Resources

Capabilities

Distinctive trademark & owns the copyright to the design of the ‘halo’ logo (Gaby Hardwicke Solicitors, 2015)

Distinctive logo and trade marks to create a recognisable brand – copyright on logo enables a monopolistic advantage – excludes competition = increase in market share and profits – enhances customer loyalty and enables more efficient marketing for new products Creativity amongst staff due to company culture – employee-led innovation Employee empowerment - actively encouraged to suggest ways to improve the business = Increase in employee satisfaction = increase in work efficiency Can use investment to develop products, grow the business and enhance research capabilities Since the initial investment Innocent have doubled in size, become market leader and raised more money for charity. This partnership will continue to assist company growth and enhance the ability to penetrate wider markets Efficiency with reduced waste and recycling of Innocent products reduces carbon footprint – Reduced environmental impact associates brand to be transparent and caring Letters/emails from consumers regarding how they feel about products, allows innocent to gain new innovative opinions

Employee sustainability culture (Engage for Success, 2016)

Access to large capital – Coca Cola further increase investment in the company (Innocent Drinks, 2016) Partnership with Coca Cola (Innocent Drinks, 2016)

Recycled packaging (Innocent Drinks, 2016)

Customer Feedback (Innocent Drinks, 2016)

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and ideas from consumers Strong sustainable brand and positive Enhances customer loyalty, increases ability ethical reputation (Innocent Drinks, 2016) to introduce new products to existing markets Reputable global suppliers (Innocent Drinks, Fruit supplied only from suppliers who look 2016) after their workers and the environment – enhance product quality High quality products – pure fruit, no Can charge a premium on their products additives and no concentrates (Masterson & Pickton, 2014) The Innocent Foundation - Charity Increase company Corporate Social (Innocent Drinks, 2016) Responsibility reputation and enforces the company’s ethical values Can keep costs low and maintain price Strong relations with suppliers - growers, stability manufacturing partners and retailers (Graham, 2011) Ethical policy and transparency (Green, The Enhance customer loyalty and trust Guardian, 2014)

3.2 VRIO COMPETITIVE ADVANTAGE TEST To follow this, the above capabilities can be assessed using the following key criteria. The VIRO test assesses Innocent’s capabilities by identifying if maintaining competitive advantage is achievable: Capability

V Value

R Rarity

I Imitability

Strong brand and ethical reputation - enhances customer loyalty & can introduce new products to existing markets Access to large capital as Coca Cola increase investment - develop products, grow and enhance research Charity foundation enhances CSR reputation and enforces ethical values Copyright on logo – monopolistic advantage and excludes competition

Yes

No

No

O Organisational Support Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

Yes

High quality – can charge a

Yes

No

Yes/No (Can imitate concept but can’t be copied) No

Yes

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premium Employee sustainability culture empowering

Yes

Yes

No

Yes

VRIO is often used to understand which resources are valuable to a corporation, and what makes them valuable, how easily they can be imitated and is the capability exploited and managed sustainably (Barney and Hesterly, 2006). A capability that can meet all four of the VRIO criteria, (value, rarity, imitability and organisational support) is considered a source of sustained competitive advantage. If a capability meets three, this can provide temporary competitive advantage (Rothaermel, 2013). Therefore, with reference to the VRIO assessment, Innocent have a competitive advantage via:  Access to large capital as Coca Cola increase investment - develop products, grow and enhance research  Charity foundation enhances CSR reputation and enforces ethical values  Copyright on logo – monopolistic advantage and excludes competition  Employee sustainability culture – empowering

Access to large capital: As Coca Cola have further increased their investment, this gives Innocent the ability to continue to develop their products. This is valuable because larger amounts of capital also enhances research and development and thus propels the corporation’s growth. Coca Cola particularly claiming to support innovation and international expansion (Innocent Drinks, 2016). This is rare as often R&D activities are difficult to finance (Hall, 2002) and it is not often smaller businesses can get such a global corporation to support them, this also makes it hard to imitate. Innocent have the organisational support to capture the value of this capability, as the company is well-known for focusing on innovation and development (Innocent Drinks, 2016).

Charity foundation enhances Corporate Social Responsibility reputation: Innocent donate a minimum of 10% of its profits each year to a charity named the Innocent Foundation which they set up in 2004 (Innocent Drinks, 2016). This is a valuable capability as a positive CSR reputation cannot only increase customer loyalty and trust but it can also attract potential investment. A good CSR reputation can make it easier to recruit employees, 7

encourages positive press coverage and companies often favour suppliers who have responsible policies (Howard, 2011). A strong positive CSR reputation is a rare capability but can be easily imitated if competitors decided to adapt their strategies to adhere to improving this area. However, Innocent does have the organisational support to further increase their CSR reputation and position.

Employee sustainability culture is empowering: Innocent’s culture focuses around their principles that everything completed internally is designed to be ethical and sustainable (Innocent, 2016). This ethical and sustainable culture is evident through their attempts to make all their packaging recyclable and using reputable suppliers but also through their employee culture (Innocent, 2016). This is a valuable capability as employees are encouraged to actively suggest ways to improve the business and this increases the feeling of empowerment. This is positive for the corporation as an empowered employee, is a more satisfied employee and research suggests job satisfaction has a positive impact on employee turnover (Khosrowpour, 1995). This is a rare capability and not imitable as this culture is unique to Innocent Drinks and their business values and ethics. The corporation does have the organisational support to use this culture to aid and influence their strategy. Their sustainability culture is shown through their employee strategy as individuals can become ‘sustainability champions’ and receive special recognition.

However, Innocent Drinks also have weaknesses, which are: Weakness Product prices are high compared to competitors (Harris, 2010)

Loss of customer loyalty due to increase in Coca Cola investment (Northedge, 2009)

Why? High quality and sustainable products is forcing the company to have higher production costs, making the smoothies more expensive than competitors – making it more difficult to obtain market share Current consumers are very loyal to the Innocent brand and may not feel positively about the increased Coca Cola investment. Coca Cola are predominantly a fizzy softdrink brand and do not have as strong of an

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ethical and sustainable culture which loyal consumers dislike. This could result in less sales and therefore profits. The strong ethical and sustainable culture The strong current culture at Innocent will could constrain strategy changes (Innocent be hard to change without upsetting Drinks, 2016) consumers. Therefore, it will be difficult to maintain customer loyalty if the corporation re-brands in future if new strategies require it. High production costs (Innocent Drinks, Upholding the image of producing high 2016) quality products, Innocent must use ethical ways of production - this then increases production costs. Increase in competitors and ‘DIY’ smoothies This means consumers have an alternative (MarketWatch, 2008) and a decrease in sales = a decrease in profits Coca Cola may influence Innocent Coca Cola are experienced in a different type of drinks market (Innocent Drinks, negatively and alter the way Innocent 2016) manage themselves internally to adjust their practices and values to be more like Coca Cola’s - cutting costs rather than being ethical Product prices are high compared to competitors: Innocent’s promise to provide high quality and sustainable products is forcing the company to have higher production costs. This ultimately is increasing the retail prices of their products and making them more expensive than those of their competitors (Harris, 2010). Therefore, an increase in competitors has threatened their market share and Innocent have seen a downturn in consumers. Innocent had a 20% drop in sales once consumers stopped buying ‘premium products’ due to the recession and introduction of ‘DIY’ smoothies (MarketWatch, 2008).

Strong culture could constrain strategy: Innocent’s very strong ethical and sustainable culture portrayed, could constrain attempts to change strategy. Innocent continue to uphold their strong ethical standards to re-enforce the brand and this could be very difficult to change without upsetting the consumer. As mentioned previously this culture is also making their products more expensive than those of their competitors (Harris, 2010), thus increases the company’s outgoings on production.

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This shows how their current culture could present problems, both financially and when trying to change their overall strategy in future.

Loss in customer loyalty due to an increase in Coca Cola’s investment: When Coca Cola invested in Innocent many of the smoothie maker’s fans were not happy. Comments from loyal customers were made such as “you just killed your business” and “it’s a sad day for independent and ethical business” (Northedge, 2009). These ill feelings towards the Coca Cola brand could result in lower levels of customer loyalty and consumers feeling betrayed. This will ultimately reduce smoothie sales and therefore profits.

3.3 SUMMARY OF INTERNAL STRENGTHS AND WEAKNESSES

The capabilities which are considered Innocent’s strengths include:  Strong positive brand and ethical reputation  Access to large capital due to the Coca Cola partnership  Distinctive trademark and copyright over ‘dude’ logo  Strong relations with suppliers  High quality products  Empowered employees  Strong customer loyalty due to ethical values  Powerful CSR reputation  Access to Coca Cola’s expertise and experience in other markets  Ability to charge a premium on products

The capabilities which are considered Innocent’s weaknesses include:  Product prices are high compared to competitors  Coca Cola are experienced in a different type of drinks market  Can lose customer loyalty as consumers may not feel positively about the increase in Coca Cola’s investment (Northedge, 2009)  The strong ethical and sustainable culture could constrain strategy changes (Innocent, 2016)

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 To maintain high quality = high production costs (Innocent, 2016)  Increase in competitors and ‘DIY’ smoothies (MarketWatch, 2008)

4.0 EXTERNAL ENVIRONMENT ANALYSIS 4.1 PESTEL FRAMEWORK

POLITICAL



ECONOMICAL



TREND UK’s planned introduction of a 20% tax on sugary drinks (Roderick 2016), (Connelly, 2016).

High prices of export markets for operations in Europe (Burns-Callander, 2015).









American drinks market (Burn-Callander, 2015).

IMPLICATION Although fruit juices are exempt from the tax, it has become public knowledge that fruit juices breach the sugar tax limit. This is a threat to the industry as people may be put off by such high sugar content. This in turn is a threat to Innocent but may also present an opportunity for Innocent to increase their product range. For companies operating globally, prices of export markets are a factor to consider. The effect of this on the industry is that this is a necessary, unavoidable cost. Innocent’s investment in Europe since 2013 has started to pay off significantly, however, their new profits are being affected by these costs. Although this is a threat to Innocent, they also offer opportunities such as moving production abroad. The US market can offer significant growth and profitability for companies operating in the fruit beverage industry. The sector is forecast to grow 10% per year for the next five years (Schmick, 2015). This is an opportunity for the UK industry, as the UK smoothie market is predicted to decline. (Burns-Callander, 2016). Moving into the US market would be a huge opportunity for Innocent as they could exploit Coca...