How External Factors and Cultural Differences Affect the Business Strategy of IllyCaffe

Executive Summary

IllyCaffe is an Italy-based company operating in the Italy under the sector C10832 – Production of coffee and coffee substitutes in the ITALY standard industrial classification (SIC) system 2007. The company is influenced by various external factors such as climate change, environmental policy of the ITALY, coffee culture, competitive rivalry, economic recession, and globalisation. IllyCaffe responses to cultural differences through various mechanisms such as: collaboration, internal communication, cross-cultural training, cultural exhibitions and expos, and diffusion of corporate culture and sustainability.

The purpose of this report is to analyse the external factors influencing the chosen organisation as well as the theme of cultural differences. In part A, the report identifies various external factors that affect the organisation and the importance of each of them to the organisation. Part B of the report analyses the relevance of the theme of cultural differences to organisation and how the concept influences policies and decision making within the organisation. The report further analyses critically the effectiveness of the organisation’s response to the theme of cultural differences in contemporary business management. Lastly, this report identifies and explains areas for improvement in terms the response of the organisation.

Part A

Primary external influences of the organisation

IllyCaffe is influenced by various environmental factors which can be analysed by PESTEL (political, legal, social and economic factors). Environmental influences affect the performance and productivity of the company. Therefore, it is important to analyze external influences in order to develop the right strategies needed to enhance increased performance and productivity in the company.

PESTLE ANALYSIS

Environmental Factors

One of the environmental factors affecting IllyCaffe is climate change. Climate change has caused adverse weather conditions in various coffee producing countries of the world (Fair Trade Foundation, 2012). In turn, this has led to uncertainties in supply of coffee and fluctuations of prices. Climate change and weather affect supply of coffee because the production of an optimum coffee crop requires specific climatic conditions. Without such climatic conditions production of coffee beans will decline, and their prices may rise; causing costs of production for the company to rise. Adverse weather conditions such as drought or frost may also affect the flowering stage of coffee production which may eventually lead to the decline of the subsequent crop. The company should therefore monitor the climate change and weather conditions of its supplier countries in order to predict the supply and prices of its raw coffee.

As a manufacturing company operating in Italy, IllyCaffe has to comply with relevant environmental policies. Italy has made significant strides in achieving certain environmental goals, especially in regards to biodiversity and water (OECD, 2013). However, there are still some challenges that may hinder the country from achieving greener and sustainable economy. Italy is concerned with use of low-carbon and efficient use of resources and energy. IllyCaffe should be committed to the use of renewable energy sources in order to reduce carbon emissions and increase efficient use of resources. This will have an impact on the cost of production in terms of energy costs. Italy is also committed to management of natural assets and improvement of environmental life quality. In order to comply with the environmental policies and promote a sustainable environment in its business activities, IllyCaffe has a certified Environmental Management System which is intended to improve production efficiency and sustainability (IllyCaffe, 2014). The company’s environmental policy and Environmental Declaration provide detailed information about the strategy and specific activities undertaken by the company to promote a sustainable environment. These strategies and activities towards the environment influence the reputation and image of the organisation as well as the expenses of running its activities.

Political Factors

Italy has a stable political environment which provides a good environment for business. Therefore, IllyCafe conducts its coffee business without fear of political risks. The country has a unitary government with democratic elections which allow people to choose their leaders. This affects IllyCaffe positively because economic and environmental policies such as taxation policies and energy-use policies are more favourable for the company if appropriate political leaders are elected by the people. Since political leaders are responsible for policy formulation, a democratic and representative political environment is likely to provide favourable economic and environmental policies that can support the objectives of the company.

Economic Factors

Following the global financial crisis of 2008 and the Euro zone debt crunch of 2011, the Italy’s economy has been affected significantly. In turn, this has affected businesses in the economy. IllyCaffe is not an exception. CIA World Factbook (2013) suggests that the 2008 global financial crisis and the 2011 euro zone debt crisis compounded Italy’s economic problems, leading to unexpected economic recession. By 2013, public debt of Italy had reached 133% of the country’s total GDP. However, the effects of euro-zone crisis started to ease down in 2013 as borrowing costs decreased. The major challenge of Italy’s economy is structural impediments to growth including tax evasion and labour market inefficiencies. This affects growth strategies of IllyCafe. Italy’s GDP of $2.068 trillion in 2013 is 8% below that of 2007 before the global financial crisis. This low GDP reflects a low purchasing power of consumers; hence IllyCafe may get low consumer purchases.

Social Factors – the Social Aspects of Coffee Drinking

Coffee culture refers to the social behaviours towards coffee consumption. Coffee consumers in the Italy are increasing. Coffee consumers consider coffee as a social lubricant. Coffee is now becoming a widely consumed stimulant in Italy. One of the common practices in a coffee culture is that there are several coffee shops just a few walks away from each other, with customers overflowing into parking lots with coffee mugs. Consumption of coffee in a coffee culture is a lifestyle. This culture formed around coffee increases its consumption; hence the sale of coffee increases and coffee manufacturers experience enhanced customer base and increased sales revenue from the sale of coffee. IllyCaffe is therefore influenced by this social culture formed around coffee in terms of customer base, sales revenue and profitability.

Porter’s Five Forces of Competition

The five forces of competition that affect the competitiveness of an organisation include: competitive rivalry, threat of new entrants, threat of substitutes, bargaining power of buyers, and bargaining power of suppliers. In terms of competitive rivalry, the firm is faces by a great deal of competition from coffee manufacturers and sellers. As companies globalize their businesses, competition increases in the international market. This affects the profitability of the organisation because increased competition reduces the company’s market share and sales revenue. The leading coffee manufacturers in Italy are Lavazza Coffee, Café River SpA, Café Molinari, Bravi Caffe SRL, Caffe Kimbo and Mami’s Caffe. These companies have established brands that enhance customer loyalty and deny IllyCaffe the opportunity to attract new customers in the Italy. Italy has a free market system which allows for free competition; hence the entry of firms is a threat to the profitability of the organisation. There is also the threat of substitutes because customers may choose other refreshments including tea, chocolate and Coco which are offered in various restaurants. Furthermore, there is a high bargaining power of buyers and suppliers who are boosted by the fair-trade standards which allow them do demand fair prices for their products; which increases costs of production for the company and decreases sales revenue.

Part 2

Cultural differences and/or cultural change

  • Analysis of its relevance to IllyCaffe

Following the analysis of the aspect of coffee culture which entails the social behaviours formed around coffee drinking, it is clear that the aspect of cultural differences and cultural change is relevant to the company. Culture being a set of values and social behaviours observed by members of a given society, IllyCaffe needs to understand the differences in culture of various consumers in order to make decisions and policies that meet the coffee culture needs of different consumers across the Italy. Italy has many groups of people with different cultural practices and social behaviours. Therefore, the company should understand these different cultural settings in order to make appropriate decisions and policies that will focus on the needs, interests and attitudes of these different societies while at the same time maintaining an appropriate competitive position in the coffee manufacturing industry.

IllyCaffe is an international company with its headquarters in Italy. Therefore, its managers operate on several cultural premises defined by differences in culture. The organisation needs to operate within a well-defined organisational culture which brings together people from different cultural backgrounds.  According to Trompenaars and Hampden-Turner (2012), differences in culture result in different views of certain management issues including authority, bureaucracy, accountability, innovation, negotiation and creativity. Cultural biases and different social behaviours lead people to view these issues differently depending on their cultural background.

These cultural biases and different social behaviours influence the decision making and policy formulation of the organisation. Seymen (2006) also suggests that most countries have different cultural makeup in relation to demographic structures. It may therefore be considered that Italy has different cultural makeup. In this case, the concept of cultural differences is relevant to IllyCaffe which operates in a multicultural society. The company needs to standardize the implementation of its policies and decisions in Italy. For instance, the company may have a multicultural workforce structure due to the cultural differences of its employees (Anwar, 2007). In this case, the organisation needs to develop appropriate policies related to cultural management in order to overcome cultural obstacles and obtain competitive advantage.

As globalization increases, many people migrate and work in foreign countries; hence coming into contact with people from completely different cultural backgrounds. Such a global marketplace brings people with different languages, norms and lifestyles together (Anwar, 2007). Management and improvement of people at the workplace requires an understanding of cultural diversity and its associated problems in terms of leadership, motivation, and authority. The company’s workforce is likely to be made up of people discriminated in terms of geographic origin, race, age, ethnicity, language, lifestyle, cultural background, sexual preference, and beliefs. Trompenaars and Hampden-Turner (2012) argue that globalisation of markets has resulted in the need for standardization of organisation design, procedures and systems.

In terms of motivation, employees from different cultural backgrounds have different motivating factors. In order to motivate employees, they should be provided with a reward system that will meet their expectations. However, differences in lifestyle, beliefs and other cultural issues will cause the employees to demand different types of rewards. Something that may motivate one employee may not motivate another. The different views of employees in terms of authority may also cause a big challenge when managers attempt to exercise authority on employees. For instance, western cultures are characterised with democracy and employees from such cultures will not be comfortable with autocratic systems.

In terms of leadership, western cultures experience transformational leadership whereby followers contribute in the decision making of the organisation (Trompenaars and Hampden-Turner, 2012). In Eastern cultures the leader imposes ideas on the followers who have no choice except to follow the decisions made by their leader. When employees from these different societies are brought together, decisions and policies will be difficult to implement. However, an understanding of cultural differences and an effective cultural management will enhance effective decision making and policy implementation.

Apart from developing organisation design and procedures related to cultural differences, IllyCaffe also needs to focus on the local characteristics of the market and the cultural system (Anwar, 2007). In theory, internationalisation and globalisation lead to a common culture worldwide. An example of such a culture is the coffee culture which started with some western countries and spread to other countries due to the globalisation of coffee manufacturing and trading business. In this perspective, cultural differences influence the decisions and policies of the organisation aimed at the consumer. For instance, perceptions of different consumers about the prices of products lead to different pricing strategies. Consumer perceptions depend on the cultural backgrounds of such consumers.

  • The Seven Dimensions of Culture by Trompenaars and Hampden-Turner, 2012

The relevance cultural differences may also be analysed using the seven dimensions of culture as suggested. Five of the dimensions were suggested by Parson and are related to the relationship with people – the way human beings deal with each other (Trompenaars and Hampden-Turner, 2012).

Universalism versus Particularism

The first dimension is universalism versus particularism. Universalist approach defines and applies what is good. On the other hand, particularist cultures give attention to the unique circumstances and obligations of relationships (Lee and Chon, 2000). For instance, a friendship may carry a special obligation instead of assuming that a certain course of action is a good way. In this case, decisions and policies in IllyCaffe will be based on the tradeoff between what is good and obligations of relationships within the organisation.

Individualism versus communitarianism

The second relational orientation is Individualism versus communitarianism (Trompenaars and Hampden-Turner, 2012). In this case, people from some cultures consider themselves as individuals while others consider themselves as members of a group. For instance, people from Italy are individualistic while people from Japan behave as members of a group. When making decisions and formulating policies, Illy needs to consider the interests of the individualistic members and communistic members of the society.

Neutral versus emotional

The third dimension is neutral versus emotional. In this case, interactions are either based on objective and detached ways or expression of emotions and bias (Anwar, 2007. In Italy, business management is about achievement of objectives. Therefore, the company needs to focus on the neutrality of its members when making decisions and implementing policies. However, those members from cultures guided by human affairs and emotions should be treated appropriately according to their cultural orientation as well.

Specific versus diffuse

Another cultural orientation is specific versus diffuse. In this case, diffuse means the person is involved in a business relationship such that there is a real and personal contact (Bird and Stevens, 2003). On the other hand, specific relationship is determined by a contract. This is appropriate in the case of IllyCaffe when it tries to win a contract in Italy. In order to be diffuse, the company needs to understand the customer instead of providing technical details about the product. However, explaining the product in detail may sometimes win the product instead of trying to understand the customer. This depends on the cultural orientation of the other party – whether diffuse or specific.

Achievement versus ascription

Furthermore, cultural orientation may be given in terms of achievement versus ascription. In terms of achievement, an individual is judged by his/her accomplishments (Trompenaars and Hampden-Turner, 2012). Ascription refers to status determined by nature, birth, gender, age or connections. When making decisions on presenting a business idea to a potential partner, Illy should understand whether the potential partner is achievement oriented or ascription-oriented. If the partner is based on the culture of achievement, the company should explain more of its achievements to the partner. If the partner is from an ascription-oriented culture, the company should focus on its status and reputation.

Attitudes to time

The sixth cultural orientation is attitudes to time (Trompenaars and Hampden-Turner, 2012). In this case, different societies look at time differently. In some cultures, what the company achieved in the past does not matter, but what matters are the plans of the company for the future. Other societies prefer past accomplishments to future plans (Seymen, 2006). In this case, the company’s communication with various stakeholders should be based on the cultural orientation of the audience. For instance, when trying to convince customers with future orientation through an advertisement, the company should take the most time explaining what it intends to achieve in future rather than what it has achieved in the past.

Attitudes to Environment

Lastly, the company may consider the cultural orientation of attitudes to the environment (Trompenaars and Hampden-Turner, 2012). In this case, some cultures consider the vices and virtues to be originating from within the person while others consider the world to be more powerful than the individual (Trompenaars and Hampden-Turner, 2012). In this case, IllyCaffe should develop policies that focus on the attitudes of individuals to the environment. In societies where the world is more powerful than the individual, the company should formulate policies that focus on environmental concerns rather than individual achievements.

From this analysis, it is clear that cultural differences in terms theory and practice are relevant to IllyCaffe as it develops appropriate policies and makes key decisions in order to achieve competitive advantage, increase its market share and grow globally. Understanding different cultural orientations is important in developing winning strategies and making successful decisions (Warden et al, 2003).

  • Effectiveness of the company’s response

As a multinational corporation, IllyCaffe understands the effects of globalisation in terms cultural differences. As a result, it has reacted appropriately to different issues of cultural differences in the Italy. This is observed in the company’s approach to environmental policies, Human Resource Management Policies, relationship with suppliers and customers, cross-cultural management and other decisions and policies. IllyCaffe is made up of people from different cultural backgrounds including intellectuals, students, NGOs, economic experts and company representatives (IllyCaffe, 2014). In order to enhance cooperation teamwork among these groups, the company promotes effective cross-cultural management strategies across its departments, most importantly the diffusion of coffee culture and sustainability throughout the organisation.

In its sustainable value report, IllyCaffe suggests that its social value is based on good relations with people. The report provides that, “The real value of life is in human relations.” This statement may be related to the five dimensions of cultural differences in terms of relations with people as analysed in the earlier section of this report. The combined effort also enhances greater value in the company as a coffee producer. The company applies universalism and particularism approaches to meet the needs of different people from different backgrounds. In this case, IllyCaffe focuses on both relationship obligation with people and the good ways. These factors promote social value for all members of the organisation. The company maintains a strong organisational culture by enhancing teamwork and working together through a shared purpose and motivation regardless of cultural background. These shared values are instilled in the company’s work environment through combined effort, cross-cultural training, and shared purpose and motivation (IllyCaffe, 2014). The company also appreciates internal relations in order to promote collaboration, enhance sense of belonging, and boost the diffusion of the company’s values and culture. In this case, the company maintains effective internal communication which enhances cohesion and sense of belonging, shared values, and inter-cultural integration and interaction.

The Human Resources policies of IllyCaffe are also based on an understanding of cultural differences. The development and management program for the company’s human resources provides professional development and equal opportunities to all associates based on merit. This means that no one is favoured or discriminated on the basis of culture. This is an important way of understanding and appreciating cultural diversity. As the company operates in Italy, it trains its employees on various aspects of culture including teambuilding, prevention of harassment at the workplace, negotiation strategies, Italian language and culture. Culture of sustainability is also diffused throughout the organisation. Through the EXPO 2015, IllyCaffe also fosters collaboration between different cultures as a way of enhancing core values within the organisation. The company offers several cultural events, debates, tastings, demos and exhibition to diffuse the culture of coffee and sustainability throughout the world. As a result, the company brings together consumers from different cultural backgrounds to enjoy coffee as part of their culture.

Recruitment process of IllyCaffe also considers the importance of collaborative relationships which can be enhanced through the selection of experienced and skilled employees from different backgrounds. There is also a program involving internal collaborations for all job positions in the company. These employees are trained and educated so that they can adapt to the cultural changes of the organisation as new employees from different cultures are recruited. In order to enhance collaboration across cultures, the management develops a wide range of complementary skills which ensure that employees are trained effectively on various cultural changes at the workplace.

This analysis indicates that the organisation’s response to cultural differences is based on collaboration, internal communication, and diffusion of culture and sustainability. Collaboration happens among employees and between the company and its partners and customers. This brings together people from different cultural backgrounds including employees, customers and partners. Internal communication enhances collaboration and teamwork among various members from different cultures. Lastly, diffusion of culture and sustainability is enhanced through collaboration, training, exhibitions and EXPOs.

  • Areas of improvement in the response of the organisation

Although the company has shown effective cultural management across its departments and stakeholders, there are areas that the company still needs to make improvements in order to promote good understanding and management of cultural differences. First, a clear cultural diversity program needs to be developed in order to enhance effective teamwork in its work environment. The diversity program should include statements of equal employment opportunity, non-discrimination, cross-cultural training opportunities, cultural exchange and equal motivation across cultures. The company should also include a minimum number of minorities to be included in the workforce as well as full representations of various cultural societies in Italy. This ensures that customers from different cultural backgrounds can be served by employees in the company who understand them and can respond to their needs effectively.

The company should also develop a customer survey on customers to determine their cultural needs by examining their values, attitudes, interests, beliefs, relations, and other cultural orientations. This will enable the company to determine the right strategies, policies and decisions that can be used to meet the needs and interests of customers from different cultural backgrounds, and to be able to diffuse the company’s culture more effectively.

Lastly, IllyCaffe can improve its management of cultural differences by integrating the idea of cultural diversity with the company’s dominant strategy. When diffusing culture and sustainability, the company should consider integrating cultural diversity in the workforce into the organisational culture of the company. This can be done by educating employees from different cultures about the organisation’s culture and aligning the objectives of cultural diversity with the overall objectives of the organisation.

 

References list

Anwar, S.T. (2007) “Global Business and Globalization”. Journal of International Management,   13, pp. 78-89.

Bird, A. and Stevens, M.J. (2003) “Toward an emergent global culture and the effects of globalization on obsolescing national cultures”. Journal of International Management,          9, pp. 395-407.

CIA World Factbook (2013) Europe: Italy, Accessed September 25, 2014 from             https://www.cia.gov/library/publications/the-world-factbook/geos/it.html.

Fairtrade International 2014, Trade Standard, Accessed September 25, 2014 from             http://www.fairtrade.net/trade-standard.html.

IllyCaffe (2014) Sustainable Value Report: Environmental Commitment, Accessed September,     2014 from http://valuereport.illy.com/en/?page=environmental-commitment

Lee, C. and Chon, K. (2000) ‘An investigation of multicultural training practices in the restaurant             industry: the training cycle approach’. International Journal of Contemporary Hospitality             Management, 12(2), pp. 126-34.

OECD (2013). OECD Environmental Performance Reviews: Italy 2013. Accessed            September 25, 2014 from http://www.oecd.org/env/country-reviews/italy2013.htm.

Nieuwenhuizen, C. and Rossouw, D. (2011) Business Management: A Contemporary Approach, Claremont: Juta and Co. Ltd.

Seymen, O.A. (2006) “The cultural diversity phenomenon in organisations and different   approaches for effective cultural diversity management: a literary review”. Cross    Cultural Management: An International Journal, 13(4), pp. 296-315.

Trompenaars, F. and Hampden-Turner, C. (2012) Riding the waves of culture: understanding         diversity in global business, 3rd edn. London: Nicholas Brealey Publishing.

Warden, C. A., Liu, T. C., Huang, C. T., & Lee, C. H. (2003) ‘Service failures away from home: benefits in intercultural service encounters’. International Journal of Service Industry   management, 14(4), pp. 436-457.

 

Appendix: Organisational Profile

IllyCafé S.p.A. is a multinational corporation founded in 1933 by Francesco Illy. It operates in 140 countries of the world, selling a single blend of quality coffee. The company had about 1,056 employees worldwide by 2013. In terms of financial performance, IllyCafé total revenue of €373.9 million in 2012. Net income margin was 2.1% and the total export sales were 60% of the total sales in 2013. Recently, IllyCaffe opened a branch of Illy’s University of Coffee in order to spread coffee culture in United Kingdom and enable professionals to learn about coffee manufacturing.

The mission of the company is to make people delightful around the world by providing the finest coffee which is perfected through the exploration of coffee’s biology and chemistry, and by seeking beauty in everything it does. Its vision is to be the benchmark of coffee culture and excellence across the world. The company also focuses on innovation and production of the finest coffee in the finest places including well-known restaurants in the Italy, especially London. Technology and innovation play a crucial role in enhances quality coffee in the company.

In terms of values, IllyCafé has shared values among various stakeholders and added value boosted by constant improvement, sustainability and transparency. The company is also characterised by excellence in terms of customer offerings and product experience. It works towards the achievement of its customer needs in all the places it operates.

The market within which the company operates is the coffee manufacturing industry. The industry is made of various competitors in the Italy including Lavazza Coffee, Café River SpA, Café Molinari, Bravi Caffe SRL, Caffe Kimbo and Mami’s Caffe. These companies compete in terms of quality of coffee, prices and customer service quality and delivery. IllyCaffe has one of the leading market shares after Lavazza Coffee. The company also enjoys premium quality and coffee culture that is enjoyed by people from different cultural backgrounds in the Italy. As an international brand operating in several countries, the company maintains a strong reputation and good image which gives a good competitive advantage in the Italy.

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