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The purpose of this case study is to discuss the business models of illycaffė to assess its corporate social responsibilities, competitive advantages, and further challenges. In 1933, Illycaffė is an Italian coffee producer has established by Francesco Illy to provide quality products and it has operations in approximately 130 countries worldwide and served in more than 50,000 public outlets, including 100 coffee bars around the globe. As in the 1990s, Brazilian producer offered low-quality products but illycaffe believed that they can produce high-quality coffee bean, Illycaffė has tried to identify the way to develop the quality of the product by considering innovation, networking, supply chain, knowledge, and importance of training. The business models of illycaffė based on the (Corporate social responsibility) CSR principle and this is substantially different from the business models, which are followed by the different organizations in coffee industry. In this analysis, the CSR concept of illycaffė explores to differentiate those from the competitors’ strategy regarding CSR. This company mainly focuses on quality and strives to achieve quality through direct purchasing and giving premium prices to the producers. They also motivate the grower through the award system and establish a university to make research on the development of the quality of coffee.
Corporate Social Responsibility
Katsoulakos & Katsoulacos (2007) argued that the regulatory authority has imposed some rules and regulations nationwide and globally regarding some issues, and these rules actually form the base for all organizations to carry out some specific functions, which is corporate social responsibility or CSR. CSR mainly comprises those different responsibilities that each organization posses apart from the profit motive, including Philanthropic, Ethical, Legal and Economic responsibility.
There are mainly four dimension of CSR and these are – Corporate Competitiveness (CC), Corporate Governance (CG), CSR, and Corporate Sustainability (CS)
The CSR of illycaffė is quite different from its competitors. The company focuses directly on the producers and the main theme of its CSR is the excellence and ethics. The company has achieved excellence through the quality of its products, and the ethics through fair trade with the suppliers; this approach differentiates illycaffė from the other competitors in the market. When other competitors are selling coffee in the market at low price and focus on the production, illycaffė undertakes suitable strategies to beat them up but its decisive focus remains on the quality coffee that is its core competency. The major issues of CSR in Illycaffė that differentiates them from the competitors are as follows:
- Customer: illycaffė maintains a high-quality coffee, and it carefully handles the coffee starting from the production level to the delivery to the customers. They feel responsible for both the selection of raw materials for the coffee (the beans) and the finished product.
- Team Spirit: illycaffė always tries their level best to increase the efficiency of their collaborator. They provide the collaborators with training on professional growth, technical knowledge, skills, work involvement, as well as other support system to increase their degree of aptitude.
- Supplier relations: illycaffė believes in long-term relationship with their suppliers, which would be mutually beneficial to both the party allowing the ethical consideration.
- Social commitment: illycaffė interprets it social commitment through activities like the focus on social issues like increasing the living standard of the coffee growers at various region and the environmental issues like the sustainable development of environment.
- Shareholders value: illycaffė also consider the interest of its financers like the shareholders by maintaining a fair cash flow, striving for the profit and so on.
Sustainability in Supply-Chain
Illycaffė encompass a unique Supply-Chain model. Where the competitors relay on the market intermediaries for their raw materials Illycaffė collect raw materials from the producers directly. The supply chain model of Illycaffė is as follows:
Impact of CSR on sustainability in the supply Chain
Sustainability in supply chain of illycaffė is the ability of the company to meet the current demand through the existing supply chain that ensures future progress through the maintenance of the current supply chain. This sustainability has based on three dimensions, which includes the following items.
The impacts of CSR on the sustainability of the supply chain are as follows:
- Quality: At the very beginning of the supply chain Illycaffė make a relationship with the grower and try to identify the problem of them in producing coffee and build support system for them. Through this process, Illycaffė strives to achieve the sustainable development in the quality along with the growers of the coffee bean.
- Supply of raw materials: Illycaffė cut all the intermediaries form their supply chain and purchase directly form the producers who grow high quality coffee. The company creates its own suppliers through giving knowledge and finance to the producers, which is mainly base on the trust upon them (Perrini & Russo 2007).
- Enhance standard of living through quality: Illycaffė provides the best knowledge for their growers of the coffee to produce high quality coffee. Illycaffė introduce award and establish university to support the growers. It will enhance the living standards of the producers through increasing their income level.
- Fair treatment: Illycaffė gives the best price to the suppliers or growers, which is certainly higher than the current market price.
The Competitive advantages of Illycaffė
After introducing a different CSR models by illycaffė it gain some competitive advantages over the business rivals or competitors. These competitive advantages are as follows:
- High quality: illycaffė has a high quality coffee than the other competitors as they collect the best quality coffee directly form the growers. Quality is the main tool for competing in market for Illycaffė.
- Supplier: illycaffė has a strong supplier base for their coffee bean as they select the best grower in different region of the globe. Illycaffė has more than three hundred supplier in the world.
- Award system: illycaffė introduce an award for the best espresso coffee producer in Brazil to select their supplier for the raw materials. Through this system, it introduces the company in that region which is the main supplier of coffee in the world.
- Market share: The CSR system of illycaffė able them to gain market share and establish them as a world’s third largest producer of coffee.
- Strong Chain: illycaffė has a strong chain for selling their coffee whole around the world as they has fifty thousand outlet for their espresso coffee and one hundred coffee bar serve in 130 countries in the world.
Business model of Illycaffė
The business models for illycaffė based on two basic values, one is the excellence, and the other is the ethics. The business model of Illycaffė substantially different for the competitors as illycaffė gives emphasis on the farm level for obtaining the high quality. Other competitor’s business model is largely base on the supplier and gives less attention on the farmer who actually produces the coffee bean. They brought raw materials from the market where the price is low but Illycaffė brought coffee from the grower pay high price than the market (Perrini & Russo 2007).
Perrini & Russo (2007) argued that the responsible strategy of illycaffė is also fundamentally different from the competitors. Most of the project of CSR run by the competitors is the improvement of economic condition of the producers, the increment of literacy level of the coffee growing countries etc. The responsible strategy of illycaffė is purely base on the development of the coffee industry as their focus on the grower and they provide all facilities to the growers of coffee to increase the standard or quality of the coffee. illycaffė introduce award system and establish university in Brazil to develop the quality of coffee and pay high price for quality coffee.
Future Challenges of Illycaffė
Illycaffė compete in the market through quality and they have a strong supplier base in the market. Still they are in the fourth position in the market and it presents a challenge for the company to be the market leader. There are also some other internal and external challenge for the company, these are as follows:
- The current market of coffee is not progressive as the supply of the coffee is mostly overlap the demand of the coffee. It presents the main challenge for illycaffė.
- The price of the coffee in the market of illycaffė is higher than the competitors and it result in losing the market share in industry. The price-cut of the coffee product of Illycaffė is another challenge.
- The production cost in another consideration for illycaffė as it buys the coffee bean form the growers’ higher price than in the market. Therefore, the costing of the blend coffee is increase.
- Sustainability with the current CSR and business model is a major challenge for illycaffė. The market of the coffee is changing rapidly, and approach and strategy of the company subject to change.
Illycaffė’s CSR strategy
Illycaffė’s CSR strategy based on the quality and they try to ensure the best quality for their customers. This strategy supported by the initiative of maintaining a responsible relationship with the coffee growers in different regions. To achieve this strategy illycaffė follows to strategy, which are the reward system and establishment of Research University, which are a long-term effort for the company.
- Espresso coffee award is initiating by illycaffė from 1991 to find out the best producers of Brazil who are the producer of major coffee bean in the world. Through this competition, company able to find out the best producer of coffee bean.
- Through this university, illycaffė try to establish the knowledge base for growing best coffee plant and transfer the knowledge to the coffee growers. It generates a tremendous result and the outcome of the research in this institute results in producing high quality coffee.
This strategies are the long-term effort of the company and not easy to imitate. Nevertheless, competitors require more ten to fifteen years imitating these strategies of illycaffė and it will be a tough job for them.
Illycaffė’s Business models
Business models comprises of infrastructure, offering, customers and finance. In infrastructure, illycaffė’s partner network is substantially different form the other competitors as they have a distinctive of supplier for their coffee blend. Illycaffė directly purchase coffee bean and has a strong relationship with the growers. They have more than three hundred suppliers and are not able to buy the entire bean supplied by the growers. There is a lot of chance for growing the business as well as production facilities. Therefore, the current approaches of Illycaffė are viable on a large-scale business.
Illycaffė’s CSR concept
Illycaffė’s CSR concept mainly focus on quality and ethical issues as they try hard and soul for maintain good quality as well as the ethical treatment with their suppliers. This concept is partially good for emerging market. It also depends upon the entry in the market. There are three strategies in market entry, which are as follows:
- Early entry: Early entry is the penetration in the market before any company enters into the market. Illycaffė’s CSR concept works well in the market where the company gets the first entry.
- Parallel entry: Parallel entry is the penetration in the market at the same time with the competitors. Illycaffė’s CSR concept may be useful for this kind of entry because the market trends likely to be build by the participants over time.
- Late entry: Late entry means the entry in the market later than the competitors do. In such a case, the concept of illycaffė may not work as the market compete more on price than quality. As the competiors set the quality standard and compete on price the hold the market share.
Kotler & Armstrong (2006) argued that market positioning is a concept where the specific product of the company fit in the market. This positioning based on the unique features of the product and there are some considerations when positioning in the market.
- Price: It dictates the price of the product as the product price is high to cheap.
- Quality: Quality is the durability of the product and the ability of the product to satisfy the need of the customer.
- Service: Service related to the value added service and other support system offered to the customer.
- Distribution: It is the channel, through which the customer gets the product of the company.
- Packaging: Packaging is the holder of the product and producer can send massage to the customer through the packaging (Kotler & Armstrong 2006).
Illycaffė’s market positioning should base on their core competencies that are the high quality product with the high prices. Illycaffė has a reputation of high quality and their business model is base on the quality.
The main brands of Illycaffė are espresso coffee with different tests. Illycaffė considered as the highest quality coffee in the world. As a result, the brand value of the Illycaffė lies on the supreme quality of the coffee. The current supply chain of Illycaffė’s depends on the collection of coffee bean from the grower of the bean based on quality. They pay higher price than the market for high quality coffee to the producers. Illycaffė maintain outlets and bar for supply their coffee to the customer who really wants to drink coffee with high quality. Illycaffė also charges premium price for their coffee. The business functions of Illycaffė are largely based on the quality as a result their sourcing and supplying strategy best fit with their brand values.
Finally, the business models of Illycaffė based on quality can be applicable to other industries where quality get the best priority. In an industrial work place like China where competition based on the price, the model will not work well. However, in the European market where the producers compete on the quality and the customer also concern about social commitment of the producers, this model of Illycaffė work good. This model is also applicable to luxurious goods industry where the quality is most important. In case of shopping goods, the business model of Illycaffė also can apply.
- Illycaffė should try to decrease the price of the product by cutting production cost as many people like substitute product due to lower price;
- Illycaffė should enhance the demand for the coffee by expanding the current market;
- It should try to find out the new market and initiate various programs to sustain the current CSR approach;
- It should introduce new product, coffee with new flavors and tastes;
- Due to oversupply and short supply unstable the market, it should introduce low price coffee to the other segment on market;
- It should take initiative to buy the remaining beans form their selective producers;
- The research on coffee should increase to explore the new tastes of coffee;
- The production methods should further examine to invent the way to produce coffee with low cost.
- Customer should give more value and try to explore the demand of them;
- Illycaffė should more aware about the movement of the competitors and take initiative according the changing strategy of competitors;
- Illycaffė should mere responsive to the market any change in market must consider by them.
After analyzing the various aspect of CSR and the supply chain model of Illycaffė, it is clear that the approaches of illycaffė are far-reaching and mutually beneficial for both the company and the producers of coffee beans. The main aim of Illycaffė is to provide high quality products with lower price and the welfare of the farmer of the coffee bean. They do not use the traditional supply chain models for their business as they cut the intermediaries form this supply chain and involve the farmers directly to supply their products. This concept has multiple benefits as company gets the expected quality product, the farmer gets fair prices for their product and the transfer of knowledge take place. Through various assessments, the concept of illycaffė proves effective, outcome oriented, and any producers can follow their approach in the industry and in production.
Katsoulakos, T. & Katsoulacos, Y. (2007) A multi dimensional view of corporate responsibility. [pdf] Web.
Kotler, P. & Armstrong, G. (2006) Principles of Marketing. 11th ed. Prentice-Hall of India Private Limited.
Perrini, F. & Russo, A. (2007) illycaffė: Value Creation through Responsible Supplier Relationships. SDA Bocconi University and EABIS.
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