Case Study on Illy Cafe

Value Creation through Responsible Supplier Relationship Introduction describes company and the goal of the paper Illy Caffe is one of the ten best companies in the coffee industry in Europe. It was founded in 1933 by Francesco Illy, and in 1994 was given over to Andrea Illy. Since its formation, Illy Caffes main goal was to deliver the best quality coffee to its customers. The company was careful when choosing its suppliers and always made sure it receives the best quality coffee beans. However, after the last CEO has joined the company in 1994, Illy Caffe decided to change its strategy and to become more responsible in the area of its business. The circumstances, which the coffee industry appeared to be under in 1989, was the first step toward the strategic changes made in some companies, like Illy Caffe. Now, Illy Caffe buys highest-quality Arabica beans directly from Brazil, Central America, India, and Africa. The company has restructured its supply chain completely, and has brought many innovations into the coffee industry in Brazil, making it the exporter of the best-quality coffee beans grower and producer in the world. The following paper aims at analyzing the changes made in Illy Caffe in 1989 and identifying the key issues and their potential solutions in the companys new strategy. Changes in Illy Caffes supply chain describes the strategy and its benefits In 1989 Illy Caffes management decided to change its supply chain from a regular one to a direct purchasing. The quality of the coffee played a significant role in Illy Caffes business. Companys CEO and managers believed that coffee loses its quality after going through different stages in the supply process. They believed that the more intermediaries they would have, the worse would be the quality of their coffee. Therefore, changing this situation through refusing to have a single intermediary appeared to be the most appropriate thing to do. Illy Caffe became the first company in the coffee industry, which started buying directly from farmers. In return to high premiums, company expected to receive higher quality coffee beans from Brazilian growers. Brazil was the largest producer of coffee at that time, however, had poor reputation because of the bad quality of their products. Illy Caffe was aware of the situation in Brazil, however, it could find required amount of growers only in that country. The company, therefore, decided to teach Brazilian farmers, how to become its suppliers. Since Illy Caffe was good at innovation throughout its existence, it found a good way to attract coffee growers (not only from Brazil but from all over the world) and to make them produce higher-quality coffee. The Illycaffe Brazil Quality Espresso Coffee Award was designed in order to find companys potential suppliers among the farmers from Brazil. The main idea of this project was to create a feeling of mutual benefit from the partnership and to motivate growers to start producing higherquality goods. Getting an award and winning a competition meant receiving a good opportunity for the company in the future. The project became very successful, and hundreds of Brazilian farmers were accepted to participate in it. Illy Caffe succeeded in finding good producers and to make them become even better through selecting them among other participants to become companys long-term partners. Illy Caffe wanted to make sure its relationship with Brazilian partners would be strong and long lasting.

Besides of solving its own problem, Illy Caffe has changed the whole idea of producing coffee in Brazil. Growers started taking more care of their farms, producers learned how to make the best coffee they can, and the overall reputation of the country as a coffee supplier has grown significantly. It became not only the largest producer but also the best one in the coffee industry. However, these kinds of changes could not leave both company and coffee business without consequences. Back in 1989 Illy Caffe has definitely gained competitive advantage through applying such an extreme method. Company has managed its Corporate Social Responsibility (CSR) in a proper way, which, in return, provided it with a higher value. However, the strategy it has used does not guarantee it will stay a leader in the market in the long run, and certain problems can occur in the system along the way. Strategys drawbacks describes drawbacks + future risks The disadvantage of a direct purchasing and possible risks in the future Supply chain has never been a subject to a change in the coffee industry before, and other large companies in this industry recognize its importance and usefulness. Usually, the supply chain goes from farmer to consumer through intermediaries, producers, distributers, and hotels and restaurants. This is a carefully though-through system, which was designed for the convenience and cost reduction of those, who are in it. The reason why large and experienced companies, who deal with the coffee, are not willing to change the supply chain is because they realize how difficult and risky direct purchasing might be. There is no one farmer, who produces the entire amount of coffee beans required by the company, especially if it operates worldwide. This means that in order to practice direct purchasing company has to enter a partnership with dozens of growers. Building a strong and long lasting relationship can be tough even with one partner; consequently doing so with ten partners is considered to be nearly impossible. Illy Caffe has solved this problem through creating a mutual benefit out of its partnership with Brazilian farmers. It has done two things: first, Brazilian growers became more skilled after participating in The Illycaffe Brazil Quality Espresso Coffee Award, and second, Illy Caffe trained potential reliable and loyal partners for its business. Competitors imitating strategy However, company has strong competitors, and they have to react to the strategy of Illy Caffe as soon as possible in order not to lose their consumers. Soon after the Illycaffe Brazil Quality Espresso Coffee Award became successful, Illy Caffes competitors started launching similar projects and offering farmers good (or maybe even better) conditions for running a business as partners. In case system proves to be safe and profitable, other companies, which are dealing with coffee products, will start applying the same strategy. After several years, in case above mentioned happens, Illy Caffe will no longer have an advantage over other companies similar to it. Another disadvantage of direct purchasing Another drawback of getting into the direct purchasing is a too broad scope of activities for the companys management. In case the business with at least one partner will go wrong, the entire company might be at risk. As was mentioned above, managing relationships with more than ten partners is an extremely difficult task and demands a lot of time and energy. Illy Caffe has managed to do it till this point because it was unique in what it did. However, when there will be other options to switch to, Illy Caffe might experience a lack in partners or will not be able to control supply processes. Premiums/ cost disadvantage/ CSR Illy Caffe attracts its partners and enables strong and long lasting relationships with them using premiums. Differently from Illy Caffes competitors, who

are still using supply chains, company buys coffee beans directly from farmers and, in order to make satisfied partners out of them, pays them more than intermediaries do in the supply chain. This is not cost effective, since these premiums are a part of companys Corporate Social Responsibility (CSR) strategy and have no effect on the prices offered to the consumers. Despite of higher costs, Illy Caffe has experienced strong increases in its growth; but, again, this was happening due to the uniqueness of the project. This, however, does not mean that the company will continue growing and earning high revenues in the future. Brazil as a growing supplier The last but not the least problem is that the coffee industry in Brazil has changed significantly after the appearance of Illycaffe Brazil Quality Espresso Coffee Award, and now Brazil is considered to be the number one coffee producer and supplier in the world. Because of this change and improved reputation of the country, it might reconsider its position in the coffee business and prices it offers to its partners. Of course, this will mean an increase in costs not only for Illy Caffe but for all other companies, which are dealing with the coffee. Consequently, this means same quality at higher prices for the consumers. Preventing losses in the future Strategies+ Company position in the market Since in few years Illy Caffe may appear in an unpleasant situation among its competitors, it needs to start taking appropriate actions in order not to lose its position in the coffee market. Imitation by the companys large competitors will result in the loss of Illy Caffes competitive advantage. Further steps need to be taken in order to stay competitive in the market, and different strategies might be of help for the company. Generally, there are four strategies, which can help the company to gain competitive advantage: differentiation, cost leadership, differentiation focus, and cost focus. Differentiation means charging customers a premium price and convincing them the product offered by the company is worth of paying more. Since Illy Caffes most important criterion is high quality of its coffee, company could concentrate on that. However, this would contradict companys CSRs strategy, which is aimed at paying premiums to the farmers without it affecting prices of an end product. In addition, there are many companies, which emphasize the quality of their products without charging an extra price. Illy Caffe would need to come up with a very convincing reason, why customers should use its products over its competitors. Cost leadership means reducing production costs to the minimum to become the cheapest producer and supplier of the end goods. In case of Illy Caffe this is nearly impossible, since it has already eliminated its supply chain and started buying coffee beans directly from the farmers. In addition, as was mentioned before, company pays a premium to its growers without charging its customers an extra fee. Cost reduction in case of Illy Caffe would, most probably, mean reducing the value of its end product, which would act against the whole idea and mission of the company. Differentiation focus means having one item among the products, which is unique and differs from competitors products. Until Andrea Illy has become companys CEO in 1990, Illy Caffe was a company of innovations. It has become one of the leading coffee producing companies due to the unique products and ideas it was bringing to the market. Second CEO, Ernesto Illy, has invested in the researches connected to the coffee business. Since company new CEOs goal to

become responsible has been achieved, Illy Caffe could concentrate on innovations again. This would help it to stay competitive in the coffee market and to differ from its competitors. Cost focus means reducing cost for one product among other products. This does not require a cost reduction in the whole production, but only a small part. Since Illy Caffe offers a number of other products besides coffee, it can choose an item to reduce a production cost of. Since the company has already a cost disadvantage over its competitors, reducing costs without harming its quality would be one of the solutions. However, coffee is the main product of Illy Caffe, and this strategy would only partially solve the problem. Another approach could be applying supply chain to a portion of the company again. A number of Illy Caffes competitors have applied this strategy and are introducing direct purchasing slowly. This could help company to partially reduce costs. It also would reduce the risk of conflict of interests with its partners. Company could retain its older and more reliable partners for the direct purchasing and include others into the supply chain. This is, perhaps, the last option company could have to consider, since it means going back but not moving forward, and only in the case of an emergency it could be applied. Conclusion No matter what strategy company decides to use, it definitely has to come up with a way to stay competitive in the market through further increasing its value for all its stakeholders. The strategies listed above have their advantages and disadvantages, and company has to consider all the possible obstacles it may have along the way. The best strategy for Illy Caffe at present would be to start an innovation process again. Through this strategy company will always remain fresh for its consumers and competitive for other companies in the coffee industry.