Theoretical background

INTRODUCTION

Rationale

In the recent 15 years, Vietnam's coffee industry has been experiencing a remarkable growth in terms of area, yield and production The export volume increased quickly from only 100,000 tons in the early 90's to above 1 million850,000 tons in 2008, bring in more than USD 1.63 billions to the country Vietnam becomes the second biggest coffee exporter in the world, just after Brazil

Vietnam is now competing with other 70 coffee producing countries worldwide The rivalry is very strong in terms of quality and price Some countries have withdrawn from this fear competition since they do not have competitive advantages.

Vinacafe is the biggest state owned corporation specialized in producing, processing and trading coffee in Vietnam

In 2008, despite of unfavorable climatic condition at the beginning of the year caused by long drought and followed by flood, Vinacafe tried its bests and produced about 50,000 tons of coffee beans from its 25,000 ha of coffee On the trading site, the export and import turnover reached USD 370 millions, leading to total sales of VND 8,500 billions. Vinacafe’s coffee export accounts for some 20% of the total country

Vinacafe’s coffee export accounts for some 20% of the total country

However, its Vinacafe's coffee export share is decreasing and more important the export efficiency is lowdeclining The Corporation suffered great losses during the recent years.The fact requires Vinacafe to find out the way to overcome the difficulty and to ensure its survival and prosperity in the coffee market.

Problem statements

i,2.1 Vinacafe's coffee export volume is declining causing Vinacafe false to fulfill the task given by the Government that the Corporation should increase its export share up to 40 - 45% of the total export of Vietnam. ii, 2.2 The economic efficiency from coffee export activities is low.: In fact, Vinacafe got losses from the export of coffee T

2.3 Other weaknesses are found in Vinacafe's exports activities:

- The Corporation does not have appropriate business strategy, especially coffee export strategy The Corporation has conflict objectives and cannot decide which the priority is

- That leads to iInternal competition occurred between its member companies reduces the business efficiency of each company and entire corporation.

- Vinacafe does not diversify its products for export Its main export items are mainstream green coffee beans with lower value

- Vinacafe does not use its resources effectively to compete successfully in the international coffee market.

Research objectives

To formulatework out appropriate and efficient coffee export strategyies for Vinacafe In order to obtain this target objective the thesis focuses on following objectives:

- To develop an overview of Vietnam coffee industry

- To analyze the external and internal factors which affect on Vinacafe's coffee export.

- To identify the Vision, mission and long-term objectives for Vinacafe's coffee export.

- To formulateselect appropriate strategyies for Vinacafe and propose measures to implement

Research questions

- What is current situation of Vinacafe's coffee export?

- Why is Vinacafe's coffee export reduced?

- What strategic implications could be useful for Vinacafe’s in improving its coffee export?

Research methodology

Research methodology is combined of qualitative and quantitative methods, data collected include both of primary and secondary.

- The primary data and information are obtained from:

- + In-depth interviews with BOM of Vinacafe, Vicofa, MARD, MOIT.

- + Observation: General Business Division of Vinacafe's Head Office.

- + Questionnaires delivered to Directors of Vinacafe's export member companies and coffee importers in Vietnam

- The secondary data and information are obtained through desk study of Vietnam's coffee magazines, journals, reports, statistical data of Vinacafe, Vicofa, MARD and MOIT.

The scope, expected results and limitation of the thesis

i, - The scope: The author focuses on analyzing Vinacafe's internal and external environment to find out the opportunities and threats as well as its internal strengths and weaknesses, critical success factors in coffee export thus to formulate propose a coffee export strategy for Vinacafe and propose measures to implement the strategy. ii, - Expected results: The expected results are as follows:

-+ To provide an overview of Vinacafe ietnam's coffeand its coffee exporte activities industry

-+ To understand the externals and internals factors that effect on Vinacafe's coffee export

+- To formulatework out an appropriate coffee export strategy for Vinacafe

- iii, Limitation: Because of the time and limited access to relevant MARD, MOIT and top managers of coffee exporters and importers, the thesis has been heavily based on secondary literature and data to formulate the export strategy.

7 Structure of thesis:1.7 Structure of thesis

Apart from the acknowledgement, table of content, executive summary, introduction, conclusion, references and appendix, the main body of the thesis is divided in to 53 chapters as follows:

This chapter gives a quick look at the theoretical framework of the thesis

Chapter 32: Analyzing Strengths and Weaknesses of Vinacafe's coffee exports

This chapter presents all research findings about opportunities, threats, strengths and weaknesses of Vinacafe's coffee exports, critical success factors and its most challenges.

Chapter 3: Analyzing Opportunities and Threats of Vinacafe's coffee exports

This chapter presents all research findings about oppertunities and threats of Vinacafe's coffee exports.

Chapter 44: Coffee export sTOWS and selection of Strategy for Vinacafe

This chapter provides author's recommendations to formulatework out an appropriate coffee export strategy for Vinacafe in the context of globalization.

Chapter 55: Proposed measures and time frame to iImplement strategyation itinerary.

This chapter provides author's recommendations to set up an implementation framework for Vinacafe.

THEORETICAL BACKGROUND

Strategic management

Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives As this definition implies, strategic management focuses on integrating management, marketing, finance/accounting, production/operation, research and development, and computer information systems to achieve organizational success [5]

According to Fred R David, the strategic management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation.

Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long term objectives, generating alternative strategies, and choosing particular strategy to pursue

Strategy implementation requires a firm to establish annual objectives, devise policies,motivate employees, and allocate resources so that formulated strategies can be executed,Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budget, developing and utilizing information system, and linking employee compensation to organizational performance

Strategy evaluation is the final stage in strategic management Three fundamental strategy evaluation activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions Strategy evaluation is needed because success to day is no guarantee of success tomorrow [5].

2 1.1.3 Process of formulating business strategy

Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives According to Fred R.David, the strategic management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation.

Figure 2 1: Comprehensive sS trategic management modelprocess

{ - Strategy formulation -}{ - Strategy Implementation }{ Strategy

Implement strategies- Marketing, Finance, Accounting R&D, MIS issues

Implement strategies- manageme nt issues

Generate, evaluate select and strategies

Source: Fred R.David (2004), Strategic management –Concepts & Cases,

Strategy formulation is sometimes referred to as determining “where you are now”, determining “where you want to go” and then determining “how to get there” and consists of four main steps: (1)

Develop Vision and Mission Statement, (2) Perform external and internal audit, (3) Develop Vision and Mission Statement

Generate, evaluate and select strategies.

21.1.3.1 Develop Vision and Mission Statement

Vision defines where the organization wants to be in the future It reflects the optimistic view of the organization's future.

Vision statement outlines what an organization wants to be It concentrates on futures It is a source of inspiration and provides clear decision-making criteria.

Mission defines where the organization is going now, basically describing the purpose, why this organization exists

Mission statement is a declaration of an organization's "reason for being" It concentrates on present, defines the customers, critical processes and informs you about the desired level of performance [5].

The importance of vision and mission statement to effective strategic management is well documented in the literature, although research results are mixed An organization develops a mission statement to ensure unanimity of purpose within the organization, and to provide a basic, or standards, for allocating organizational resources as well as to establish a general tone or organizational climate.

A mission statement can resemble a vision statement in a few companies, but that can be a grave mistake It can confuse people The vision statement can galvanize the people to achieve defined projects, even if they are stretch objective, provided the vision is SMART(Specific, Measurable, Achievable, Relevant and Time bound) A mission statement provides a path to realize the vision in line with its value These statements have a direct bearing on the bottom line and success of the organization [21].

A mission statement is more than a statement of specific details, it is a declaration of attitude and outlook and includes main components such as: customers; products or services; markets; technology; concern for survival, growth and portability; philosophy, self-concept; concern for public image; concern for employees.

21.1.3.2 Perform external and internal audit (SWOT analysis).

SWOT analysis is a strategic planning tool used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture It involves specifying the objectives of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective The technique is credited to Albert Humphrey, who led a research project at Stanford University in the 1960s and 1970s using date from Fortune 500 companies [21].

The aim of SWOT analysis is to identify the key internal and external factors that are important to achieving the objective SWOT analysis group key pieces of information into two main categories:

- External factor: The opportunities and threats presented by the external environment

- Internal factor: The strengths and weaknesses internal to the organization

A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors: Political, Economic, Social, Technological.

The acronym PEST is used to describe a framework for the analysis of these macro- environmental factors [21].

Political Factors: Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate Some examples include:

Economic Factors: Economic factors affect the purchasing power of potential customers and the firm's cost of capital The following are examples of factors in the macro-economy:

Social Factors: Social factors include the demographic and cultural aspects of the external macro-environment These factors affect customer needs and the size of potential markets. Some social factors include:

Technological Factors: Technological factors can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions Some technological factors include:

Model provides a simple perspective for assessing and analyzing the competitive strength and position of a corporation competitive position or business organization Porter’s Five forces model can be used to good analytical affect alongside other models.

The Porter's model has two implications: Firstly, the five forces analysis is to get an assessment of the attractiveness of an industry Secondly, it will help a firm to formulate an appropriate competitive strategy.

According to Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces: relationship among competitors within an industry, potential competitors, suppliers, products and consumers.

The five forces determine industry profitability because they influence the prices, costs and require investment of firms in an industry - the elements of return on investment

Figure 2.2: Porter’s five force model

Source: Michael Porter (1985), Competitive Advantage

International trade management

2 2.1 The role of international trade:

International trade plays an important role in the world today and has been carried on between countries and geographical regions for thousands of years Over the centuries, international trade, although periodically interrupted by wars and natural disaster, has gradually expanded, usually at faster pace than the expansion of the world output. International trade creates value for both producers and consumers, increases demand for exportable products, thereby raising price and volume It also increases the efficiency of resource allocation worldwide and reduces production costs through economies of scales, and lower input cost For a developing country like Vietnam, international trade, especially exporting is very important as it brings in income for labors, necessary foreign currency to develop the economy

International trade trading environment is complex and ever changing To manage international trade operations within this environment, a framework of analysis is useful A framework can be used to disentangle the many factors that drive international flows of goods and services. i PEST (politic, economic, social and technology) system and how this system affects the firm’s comparative and competitive advantage. ii Countries abroad as markets for export iii Tariff and non-tariff barriers to trade and government incentives to promote trade iv Linking producers and buyers through trade intermediaries [6]

Each firm operates with thin the social, technological, economic and political environment of the country in which it produces The PEST environment has a strong influence on the firm: the cost, quality, and range of products it produces, domestic demand for its products, and process technology it uses, is efficiency and scale of operations, the cost and availability of natural resources and factor inputs, such as capital and labor, the range of support industries, and how and where it markets its products

The firm’s PEST environment influences the comparative advantages of the products its produces relative to products produces by other firm abroad The firm’s PEST environment may also influence its competitive advantage in the national market and abroad [7].

The way a company chooses to export its products can have a significant effect on its export plan and specific marketing strategies The basic distinction among approaches to exporting relates to a company's level of involvement in the export process There are at least four approaches, which may be used alone or in combination:

Passively filling orders from domestic buyers who then export the product.

These sales are indistinguishable from other domestic sales as far as the original seller is concerned Someone else has decided that the product in question meets foreign demand. That party takes all the risk and handles all of the exporting details, in some cases without even the awareness of the original seller Many companies take a stronger interest in exporting when they discover that their product is already being sold overseas.

Seeking out domestic buyers who represent foreign end users or customers.

Many foreign corporations, general contractors, foreign trading companies, foreign government agencies, foreign distributors and retailers, and domestic companies as well purchase for export These buyers are a large market for a wide variety of goods and services In this case a company may know its product is being exported, but it is still the buyer who assumes the risk and handles the details of exporting.

With this approach, a company engages the services of an intermediary firm capable of finding foreign markets and buyers for its products Export management companies, export trading companies, international trade consultants, and other intermediaries can give the exporter access to well-established expertise and trade contacts Yet, the exporter can still retain considerable control over the process and can realize some of the other benefits of exporting, such as learning more about foreign competitors, new technologies, and other market opportunities.

This approach is the most ambitious and difficult, since the exporter personally handles every aspect of the exporting process from market research and planning to foreign distribution and collections Consequently, a significant commitment of management time and attention is required to achieve good results However, this approach may also be the best way to achieve maximum profits and long-term growth With appropriate help and guidance from the Department of Commerce, state trade offices, freight forwarders, international banks, and other service groups, even small or medium-sized firms, can export directly if they are able to commit enough staff time to the effort For those who cannot make that commitment, the services of a trade consultant or other qualified intermediary are indispensable [21].

Formulating an export strategy based on good information and proper assessment increases the chances that the best options will be chosen, that resources will be used effectively, and that effort will consequently be carried through to completion The purposes of the export plan are, first, to assemble facts, constraints, and goals and, second, to create an action statement that takes all of these into account The statement includes specific objectives; it sets forth time schedules for implementation; and it marks milestones so that the degree of success can be measured and help motivate personnel [2].

The first draft of the export plan may be quite short and simple, but it should become more detailed and complete as the planners learn more about exporting and their company's competitive position At least the following ten questions should ultimately be addressed: i What products are selected for export development? What modifications, if any, must be made to adapt them for overseas markets? ii What countries are targeted for sales development? iii In each country, what is the basic customer profile? What marketing and distribution channels should be used to reach customers? iv What special challenges pertain to each market (competition, cultural differences, import controls, etc.), and what strategy will be used to address them? v How will the product's export sales price be determined? vi What specific operational steps must be taken and when? vii What will be the time frame for implementing each element of the plan? vii What personnel and company resources will be dedicated to exporting? ix What will be the cost in time and money for each element? x How will results be evaluated and used to modify the plan? [21]

There are no limits for the number of factors in a concrete export strategy as it depends on external and internal environment However the exporting strategy usually comprises of the following important factors: The Products development, Market penetration and development, Human resource, Pricing policy and Sale promotion.

In this theoretical background the author has given the theories on strategy management and international trade management This is the basic for analysing coffee business environment and formulating export strategy for Vinacafe in the following chapter The internal assessments are carried out by using 4P model as well as analysing Vinacafe’s internal resources Meanwhile PEST model and Porter’s Five force model are used to scan macro and micro-environment for Vinacafe’s coffee business The SWOT strategic matrix together with theory on export strategy is the basis to generate and formulate strategies. The author also refers to QSPM so as to put the alternative strategy in prioritized list.

SWOT analysis is a strategic planning tool used to evaluate the Strengths,Weaknesses, Opportunities, and Threats involved in a project or in a business venture It involves specifying the objectives of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective The technique is credited to Albert Humphrey, who led a research project at Stanford University in the 1960s and 1970s using date from Fortune 500 companies.

ANALYZING VINACAFE'S COFFEE EXPORT

External analysis

In Vietnam, the social security and welfare are maintained; national sovereignty, political security and social order and safety guaranteed; the country’s status and strength further consolidated, and its position heightened on international arena That gives trust and believes to the business community to invest and develop its business activities.

The government advocates removing all obstacles to investment and business in order to promote production and expand market; to simplify administrative procedures, especially in such fields as market access, capital construction, customs, tax declaration and payment, so as to save costs and sharpen enterprises’ competitiveness It is the State’s determination to cut down at least 30% of current administrative procedures The Government’s commitment is being transformed into actions of ministries, sectors and localities [1].

Apart from administrative procedure reform in favor of investment, production and business, the Government will channel its aid to agriculture and rural areas, and perfect credit guaranteeing mechanism for small and medium enterprises, facilitating their access to development resources.

The export license for coffee had been slightly abolished since 1995 All the companies were eligible to export coffee if met with the following requirements:

Being a member of Vietnam coffee and cocoa Association

Having warehouse and processing facilities of at least 5,000 tons a year

Having adequate experienced staff, financial abilities and export markets.

Since 1998 the export of coffee beans had been liberated At present, all the companies that have business registration of exporting coffee are allowed to export coffee without any limitation and intervention [3]

Moreover, the government has incentive policies for coffee exportation, such as providing preferable loans and bonus for the coffee exporters The loan comes through Export Support Fund with interest rate equals to half of the normal one Bonus is another encouragement as the exporters get some VND for each USD of their coffee export turnover Taxation policy is amended to promote export coffee Coffee export is exempted from export tax and VAT tax is refunded to the exporters when their coffee had been exported [11]

According to the regulations of Asean Free Trade Agreement (AFTA) tariff, Vietnam has to reduce its tariff for coffee products from 50 - 70% to only 5% in 2006 [17] The sharp reduction in import tax would definitely lead to stronger competition for Vinacafe’s products The Vietnam’s commitments to joint WTO, moreover, would also lead to more participation of new foreign competitors in the local market

The biggest event for Vietnam’s trade in the recent years was the country officially becomes the 150 th member of the WTO The entrance brings in broaden market for Vietnamese coffee At present, Vietnam’s coffee has been being exported to more than 60 countries and territories and it is expected that the number of export markets will increase quickly in the coming time Together with the expansion of market, the tariff for importation of Vietnam’s coffee is reduced For example, the import tax for Vietnam’s coffee to EU countries will reduce from about 5-10% to only 0 – 3% That makes Vietnamese coffee more competitive in the market

Joining WTO and integrating deeply into global economy bring in not only opportunities but also threats for Vietnamese enterprises especially those who are not well prepaid for that The competition increases as more and more foreign companies are allowed to do business in Vietnam With the remarkable advantages in terms of finance, management, marketing and human recourses they will be the heavy competitor for all Vietnamese companies including Vinacafe In the coffee industry, there are already ten foreign companies setting up their own factories in Vietnam and competing in procurement, processing and exporting with Vinacafe This number will increase sharply in the near future.

Also, Vietnam has to implement what we have committed before joining WTO The government will reduce and gradually eliminate all the incentive policies towards SOEs such as preferable loans, subsidiaries That will absolutely affect to Vinacafe’s activities

In the world market, the new and stricter Regulations on food hygiene and safety require food manufacturers to pay more attention to their processing rightly from raw materials selection It has subsequently increased cost of production leading to lowering price competitiveness In addition, this is a regulation for content of carbohydrates in instant coffee stipulating that any break of control limit of total glucose, total free fructora will lead to products rejection

Other limit of Ochratoxin A (OTA) for green coffee beans and coffee products imposed byUSA and EU is considered as trade barrier for coffee products to penetrate into the market,especially export market It is estimated that if the Ochratoxin A limit of 5ppm is applied,about 5% of total world coffee including 10% Vietnam’s coffee will be rejected In the globalization process, the rich countries tend to use more non tariff barriers to protect their domestic industries.

Last but not least, the government is going to approve the radical restructuring plan submitted by Vinacafe Vinacafe will change its management and organization structure from administrative management of the general corporation to active management of the holding company As for finance, Vinacafe has a good chance to write off the debt and recapitalize In the period of 2001 – 2003, even the price was extremely low Vinacafe was asked to purchase and export coffee with big quantity to ensure the benefits for million of coffee growers in Vietnam Consequently, Vinacafe have had serious losses, the debt increases and money for upgrading equipment and machineries is limited Financial restructuring will help Vinacafe overcome this difficult situation and build up the firm base for future development

In 2007, Vietnam achieved the highest growth rate in the past ten years (8.5%), creating a strong base for the fulfillment of the main objectives for the period of five years 2006 -

2008 However in the following year 2008 and also 2009, Vietnam had to cope with many difficulties, especially the global financial crisis Since September 2008, the financial crisis and economic recession, rising from the US, spread out worldwide, seriously affecting most of economies and causing negative impacts on our country, especially in terms of export, investment capital, tourism revenue and remittance, diminishing growth and threatening macro-economic stability and social security [1]

The price of fuel, raw material increases, banking interest raises, credit is tightened, currency and exchange policy fluctuates complicatedly, demand decreases causing many difficulties for the business community including Vinacafe

Recognizing serious impacts of the crisis, in early quarter IV of 2008, Vietnam shifted priority targets from curbing inflation to preventing growth recession while maintaining macro-economic stability and social security The Government timely issued economic stimulus policies and provided interest rate incentives in line with the actual situations in order to boost up production and business, secure employment and growth.

Internal analysis

In 2008, Vinacafe produced 45,230 tonnes of coffee from its own plantations, but the exporting enterprises exported a total of more than 250,000 tonnes, so the plantations are producing less than 20% of the coffee that is exported by the group.

However the more important is that the farms play a key role in agricultural extension services for the farmers surrounding the farms Thanks to concentrated plantation and GAP, the yield as well as quality of coffee in Vinacafe’s farms is far better than that of the individual smallholders Also, it is much more convenient to apply new farming technique to produce high quality coffee such as: specialty coffee, gourmet coffee, organic coffee to get premium

In 2007, Vinacafe started growing coffee in accordance with Common Code for Coffee Community’s standards This coffee will be examined and certified by the team of international inspectors and sold at premium 40 – 80 USD/ton The organic coffee produced by Vinacafe is also highly appreciated in the Japanese market at better price. However because of lack of investment and efforts, total quantity of organic coffee exported by Vinacafe is very small, just 2,000 to 3,000 tons per year

Every farm under of Vinacafe has its own processing facilities The processing facilities include dryers, hullers, color sorter, screeners….and able to process dried cherry in to coffee beans The farms do not only process their own coffee but also provide processing service for the farmers in the surrounding areas The export companies of Vinacafe own a large processing factories and storage warehouse Total processing capacity of Vinacafe is 300,000 MT of coffee beans a year.

Most of the processing equipments are local made and backward Vinacafe has been investing much money to import modern processing facility from Brazil, England to improve the product's quality for export In period 2005-2008 Vinacafe has imported ten color sorters and 15 dry processing lines to increase the processing capacity However, the processing capacity cannot meet with the demand At present, the international customers usually require high quality coffee with zero percent black beans and foreign matters To produce this coffee grade, the color sorters, wet polishers and steaming machines are vital since it cannot be done by manual workers The investment for these equipments is as high as USD 300,000 for 20,000 tons coffee beans

At present Vinacafe owns two value added processing lines at Vinacafe Bien Hoa The old line with capacity of 100 tons of instant coffee a year was inherited from the French owner in the year 1975 The new line valued at USD 20 millions was imported from Denmark in

1999 The processing lines are now producing various type of coffee such as roasted coffee, ground coffee, instant coffee These products are consumed locally and exported. Beside that, Vinacafe has four smaller roasting facilities to serve the local demand.

In 2008, Vinacafe produced 500 tonnes of roasted coffee and 8,000 tonnes of coffee in soluble coffee and coffee mixes Of which only 20% were exported to the USA, China and Russia Still, Vinacafe lacks of value added processing capacity

Coffee is largely exported in its raw form as green coffee Only 5.9% of coffee is exported in soluble form and 0.1% as roast and ground.

As for structure of products: More than 97% of Vinacafe’s coffee exports are in the form of green beans In which, Robusta exports account for 90% meanwhile Arabica shares only 10% of total export Only 3% of Vinacafe’s export is processed coffee, such as: roast, ground or soluble coffee

The price for Arabica is usually 1,5 – 2 times higher than that of Robusta and the demand for Arabica is bigger (about 70% of world coffee consumption is Arabica) However the total Arabica exports of Vinacafe are only 20,000- 25,000 tons/year It can be said that Vinacafe has unsuitable product structure to meet the market demand With the development of Arabica coffee area in the Northern part of Vietnam, Vinacafe can have a good chance to change its product structure by the year 2015.

As for quality of products: Since liberalisation of licensing in the last ten years, Vinacafe appears to have managed to maintain their share of export quantity, although this declined in 2008 Because of the lack of investment in drying, processing, warehousing the coffee quality is not high and unstable Most of the exported coffees beans are of grade 2 with 20- 30% lower in price in comparison with that of grade 1.

Table 3.3: Vinacafe’s Coffee Export Grade

The figures indicate that the quality of Vinacafe’s coffee has been much improved in the period of five years Percentage of grade 1 increased from 18% to 24% in 2008/2009 crop. The grade 2A also rose from 45% in 2004/2005 crop to 64% in the last crop meanwhile grade 3 decreased to only 2% in 2008/2009 crop.

The international customers usually complain on the moisture, bean size, defects, foreign matters and moldy of coffee beans supplied by Vietnamese exporters [15] The coffee area increases very quickly during the last two decades, however, the processing has not yet been paid much attention to catch up with the rapid growth of output Because of its low unstable quality, the price of Vietnamese coffee beans is 80 – 120 USD/MT lower than that of other producing countries

Vinacafe is also involved in manufacturing coffee products Coffee products usually take some form of preparation (brewing or stirring) except in the case of liquid coffee Coffee products include whole bean, pre-packed roasted & ground, instant, and liquid coffees that are ready to drink Vinacafe Bien Hoa, situated near Hochiminh City, manufactures a range of soluble and 3 in 1 (coffee, milk and sugar) products with the Vinacafe brand These are marketed domestically and some exported, especially to China Vinacafe Hanoi manufactures a small quantity of roast and ground coffee and also packs 3 in 1 for marketing locally through their own shops and other channels under the Dragon brand.

Vinacafe has recently installed a new production line with spray dried technology It has instant coffee machinery that extracts at a good rate of 36-37% of the green bean weight. Modern soluble plants require much higher investment and use agglomerate and freeze drying techniques and can extract at higher rates Vinacafe Hanoi has very old machinery for roasting and packaging.

SWOT table

3 4.1.Strengths i, Being the biggest buyer in the domestic market and the biggest seller on the international market, Vinacafe has high bargaining power on both selling and buying sides and plays an important role in determining and regulating local market price ii, Broad network of processing and procurement allows Vinacafe to source coffee from different areas and meet with diversified demands of the customers Vinacafe can supply various kinds of coffee with big quantity and regular shipments This allows Vinacafe to have big and long term contracts with the customers and earn higher prices. iii, Vinacafe is not a pure trading company since it also has 25,000 hectares of plantations. Vinacafe can ensure the quality of coffee from growing stage, introducing new variety of high yield, better aroma and taste in its plantations and producing special products, such as: organic coffee, fair trade coffee for special demands at special prices iv, Good relationship with the customers is another strength of Vinacafe Vinacafe can sell and buy coffee at any time it wants and any quantity it wishes because of broad, close and deep relations with the customer world wide v, As an SOE established according to “91 G.C model” Vinacafe has special relations with the government and ministries concerned Vinacafe is fully back up by the government.

3 4.2 Weaknesses i, The current traditional vertical structure with centralized power, many layers and lack of horizontal communication and collaboration is the most impediments in Vinacafe’s operation and future development ii, Internal duplication and competition reduce the strengths of Vinacafe. iii, Lack of training and trading skills results in poor human resources that lead to bad export performance iii, Weak financial ability, low export performance efficiency. iv, Backward technology and equipment makes the coffee is not well accepted in the market and sold at lower price.

3 4.3 Opportunities i, Market is expanded and tariff is lower when Vietnam joints WTO and deeply integrates in to regional and global economy. ii, Favorable natural conditions bring in for Vietnamese coffee good natural quality and high yield so as to lower the production cost iii, Exchange rate (USD/VND) increases, bring in more benefits for the exporters. iv, Government’s export promotion policies to be in favor of the exporters. v, E-commerce development and new “steaming” technology to change Robusta into mild coffee at better price. vi, Demand of coffee is increasing

3 4.4 Threats i, More competition both locally and internationally ii, Soil degradation iii, More strict food safety regulations (non tariff barrier) iv, Incentive policies to be reduced or eliminated v, Labor turnover.

The deep analysis of external and internal environment for Vinacafe’s export performance has been done on the basic of theoretical background mentioned in Chapter 2 The results shows that the external and internal issues are very complicated and ever changed,affecting directly or indirectly to the coffee export performance of Vinacafe The strengths,weaknesses, opportunities and threats withdrawn from that analysis are used to set upSWOT matrix that is very important to propose export strategy for Vinacafe.

2.2 Vinacafe's coffee export performance 2.2.1 Main coffee export item:

Coffee is largely exported in its raw form as green coffee Only 5.9% of coffee is exported in soluble form and 0.1% as roast and ground.

Figures 7: Categories of exported coffee from producing countries

More than 95% of Vinacafe’s coffee exports are in the form of green beans In which, Robusta exports account for 90% meanwhile Arabica shares only 10% of total export Only 5% of Vinacafe’s export is processed coffee, such as: roast, ground or soluble coffee

Since liberalisation of licensing in the last ten years, Vinacafe appear to have managed to maintain their share of export quantity, although this declined in 2007 It should be noted that Vinacafe exporters and Vinacafe Buon Ma Thuot in particular,are recognised in the trade, (both in Viet Nam and abroad), for competitive and timely procurement as well as export performance of contract terms Only Vinacofexim (The Company for Processing, Trading and Import and Export of Coffee) and Vinacafe Nha Trang have ever been named for default by a major buyer.

The performance of Vinacafe’s exports against the data obtained from ICO is perhaps more meaningful because they are both for calendar years Export prices obtained are slightly better for Vinacafe than the overall Viet Nam prices.

Because of the lack of investment in drying, processing, warehousing the coffee quality is not high and unstable Most of the exported coffees beans are of grade 2 with 20-30% lower in price in comparison with that of grade 1.

The international customers usually complain on the moisture, bean size, defects, foreign matters and moldy of coffee beans The coffee area increases very quickly during the last two decades, however the processing has not yet been paid much attention Because of low quality the price of coffee beans are sold 100USD -

150USD/MT lower than that of some neighboring countries

With the development of Arabica coffee area in the North and Western highland, export of Arabica beans increases However the total Arabica exports of Vinacafe only reach 20,000- 25,000 tons/year.

Vinacafe is also involved in manufacturing coffee products Coffee products usually take some form of preparation (brewing or stirring) except in the case of Liquid Coffee Coffee products include whole bean, pre-packed roasted & ground, instant, and Liquid Coffees that are ready to drink Vinacafe Bien Hoa, situated near Hochiminh City, manufactures a range of soluble and 3 in 1 (coffee, milk and sugar) products with the Vinacafe brand These are marketed domestically and some exported, especially to China Vinacafe Hanoi manufactures a small quantity of roast and ground coffee and also packs 3 in 1 for marketing locally through their own shops and other channels under the Dragon brand.

Vinacafe Bien Hoa has recently installed a new production line with an investment of US$ 6.5 million It has sprayed dried, instant coffee machinery that extracts at a good rate of 36-37% of the green bean weight Modern soluble plants require much higher investment and use agglomerate and freeze drying techniques and can extract at higher rates Vinacafe Hanoi has very old machinery for roasting and packaging.

The total market size for Viet Nam coffee is 70,000 tonnes per year Roasted Coffee accounts for 95% of consumption or demand with 9% per annum growth over the last three years Instant coffee accounts for 5% of consumption or demand but with 40% growth per annum and increased penetration on all coffee drinking occasions. Nescafe grew 60% last year and is now achieving 58% market share since entry in

1997 Consumption is about 1kg per capita per annum compared with the S E Asian average of about 200 grams per capita In the domestic and the regional markets,there is a good robust increase in consumption compared to traditional markets This increase is mainly in the 3 in 1 soluble In Viet Nam there is also a culture for drinking roast and ground coffee Consumption patterns in the North and South differ due to seasonal climates in the North There is tendency in the North to drink more hot coffees (roasted / instant) during the winter Total volume of consumption for both roasted coffee and instant coffee in the South is significantly higher(approximately 35% more) than the North.

While there exist a strong coffee culture base, there are very few established brands or companies developing an aggressive value-chain to build up operations that offer depth in coffee products and services.

Currently the main competition is between the major players, Vinacafe, Trung Nguyen, and Highlands Coffee There is also competition between over 10,000 small family owned roasting operations averaging 500 kg sales per month The roasters use primitive technology and often confuse mixing beans as blending The coffee is often adulterated with corn, green peas, butter, coffee oils and even fish sauce The potential exists to create and expand premium roasted coffee brands, Dragon – Bien Hoa - Vinacafe, which the Company can leverage for manufacturing, distribution, and retailing for expansion throughout Viet Nam and gradually into international markets Apart from the S.E Asian countries, consumption growth and opportunity also exists in North Africa, the Middle East and particularly East European countries, where Viet Nam has historic trading relations.

COFFEE EXPORT STRATEGY FOR VINACAFE

Vision statement

To become the world’s biggest supplier of Vietnam’s coffee.

The most three important components should be included in the mission of Vinacafe is: products, concern for growth and profitability and concern for public image.

Products: Vinacafe grows, processes and trades of coffee and other agricultural products: pepper, rubber, However it is necessary to emphasize coffee is Vinacafe’s key product. Vinacafe can produce various types of coffee When people think about coffee they will remember Vinacafe as their first choice.

Concern for growth and profitability: Vinacafe is a leading company specialized in coffee It is an advantage of the company Customers usually believe and trust more the big company Profitability should also be included to attract new investors, shareholders or other stakeholders for the future development of the company

Concern for public image: Customers now do not only think about price, quality of a product, but also “how is it produced”? The main market for coffee is US, Japan and Europe, where people are concerning much about food safety and environment protection.

In the coffee growing, it means using less chemical fertilizers and insecticides and therefore reducing harmful substances residue in coffee products This is the reason why specialty or gourmet coffee is sold at extremely high price So, it is important to highlight about quality and environment protection.

The mission of Vinacafe is as follows:

“To grow coffee in environment friendly ways, to process coffee using advanced technology and to provide good quality coffee to domestic and international customers in order to maximize financial returns”

The strategic objective for the exporters under Vinacafe:

- Paying dividends to Holding Company

- Achieving 45 - 50 % share of Vietnam’s exports

- Creating a position where the barriers of entry to new entrants are high through securing supplies under long term contracts.

- The author tries to link the strategic objectives in respect of the exporters with the 4 competitive forces analyzed previously:

Figure 4.113 : Link strategic objectives with competitive forces:

Rivalry among existing industry competitors

 Improve quality by comparison to competitors

 Reduce processing and other costs by comparison with competitors

 Improve stability of supply by comparison with competitors

 Increase potential market through joint ventures Potential new entrants  Improve quality by comparison to new entrants

 Reduce processing and other costs by comparison with new entrants

 Improve stability of supply by comparison with new entrants

 Increase potential market through joint venturesSuppliers  Set up network of receiving stations to purchase from farmers

 Contract with new private service companies located at existing plantations as receiving stations that also provide full range of services to farmers

 Provide better incentives to suppliers to ensure they become the farmers’ partner of choice

 Reduce purchases from traders Buyers  Sell increasing volumes directly to roasters

 Increase reputation of Vinacafe as being reliable contract partner of buyers

 Improve level of service provided to buyers

 Improve quality – greater proportion of turnover processed at own processing facilities

The author maintains that, despite all its difficulties, a part of the answer lies in securing long term contracts with farmers, and in turning substantial numbers of farmers into Vinacafe’s partners, and by so doing deny access to other competitors to the coffee that they produce Otherwise, it is easily to see Vinacafe losing market share in the future

This cannot be done in one day There is however an opportunity in the prospective change in the contracting system to convert the existing contractors into Vinacafe partners and then to build on this The challenge is huge The priority is to get the current trading onto a firm footing, aiming at eliminating, as far as possible, speculative losses Processing costs must be minimized, with quality being increased The market would appear to be looking for consistent quality from reliable partners Vinacafe can provide this.

Vinacafe must ensure that it has all of the main coffee growing areas covered by its own exporter owned or contracted receiving stations This is the next step (after the current contractors) of securing its position with the suppliers, and making it difficult for competitors to take over Vinacafe’s existing business The current practice of buying from traders leaves Vinacafe very vulnerable.

It is essential to be seen by buyers as being the most reliable partner in Vietnam This is a question of ethic, and taking a long term view in preference to short term gain.

Figure 4.124 : The long term objective s for Vinacafe

 Access additional customers through trade investor

 Obtain trained expert(s) from trade investor

According to theory, the matching of the strategy formulation framework consists of five techniques: the SWOTOWS matrix, the SPACE matrix, the BCG matrix, the IE matrix, and the Grand strategy matrix The author chooses SWOTOWS matrix to find out appropriate strategies.

Figure 4.315 : SWO T OWS matrix for Vinacafe

1 Biggest buyer in the internal market, biggest seller on the int’l market.

2 Broad network of processing and procurement stations

5 Skilled and experienced staffs in growing.

6 Good relation with the government

1 Weak management and trading skills

4 Low operating efficiency: financial losses

1 Market is expanded and tariff is lower when VN joints WTO

- Market penetration + Increase sales in the current market

+ Come closer to the end buyers or consumers.

+ Establish rep office or branches abroad.

4 More strict food safety regulations.

5 Incentive policies to be reduced or eliminated

- Low cost + Advantages of low cost producers

+ Increase export volume to take advantages of economies of scale.

- Restructuring + Decentralizing + Power empowerment + More controlling + Training

Figure 4.4Table 6 : The Quantitative Strategic Planning Matrix for Vinacafe – QSPM

Market development Market penetration Forward intergrationinte gration

Key factor Wei ght AS TAS AS TAS AS TAS AS TAS AS TAS

1 Market is expanded and tariff is lower

3 Incentive policies to be eliminated

Note: AS: Attractiveness Score; TAS: Total Attractiveness Score

Attractiveness Score: 1= not attractive; 2= somewhat attracttiveattractive; 3= resonablyreasonably attractive; 4= highly attractive

The Quantitative Strategic Planning Matrix shows the prioritized list of strategies is as follows:

2 Market penetration: Increase sales in the current markets

3 Low cost: Maintain its price competitiveness.

4 Market development: Find new markets for Vinacafe’s coffee.

4 4 Coffee export strategy for Vinacafe

On the basic of the theory on strategic management, international trade strategy and theSWOT analysis, the author proposes coffee export strategy for Vinacafe including two important parts: marketing and restructuring as follows:

4.4.1.1 Products strategy i, Change products structure for export: As analyzed above that the current products structure of Vinacafe is not suitable for the market Arabica is more demanded and sold at higher price however it accounts for only 5% of total export Vinacafe should increase the export of Arabica beans by at lest 30% since this coffee is highly demanded in the international market ii, Diversify products for export: Vinacafe should focus on exporting more specialty coffee such as organic, 4C coffee, value added coffee to meet with diversified demand of the customers and get premium People in the developed countries tend to use more environment friendly products so that the opportunities for such types of coffee are high. iii, Improve product quality: The improvement of coffee quality is very important as it will improve Vinacafe’s image in international market Vinacafe applies properly and strictly quality management system according to international standard to improve its competitiveness and product’s prestige in the market The quality of raw beans are closely checked before entering into processing stage

Vinacafe should set up a concrete plan for the development of products with different quality from low to high to meet the demand of various customers Japanese customers usually require top quality however those from neighboring countries prefer cheaper products with reasonable quality.

In the context of competitive market, Vinacafe should pay due attention on the packaging, storage, transportation and delivery since it will have certain impact on product’s quality before reaching customers.

4.4.1.2 Market strategy i, Market development: Vinacafe exports coffee to only 40 countries and territories.However, there are now more than 180 countries in the world using coffee The potential for market development is big especially when Vietnam becomes a member of WTO. Vinacafe should promote its strength as a low cost producer together with the opportunity of reduced tariff in expanding new markets, such as: China, Eastern Europe and African countries It is expected that the demand for coffee in these markets would raise more than 10% per year. ii, Market penetration: This strategy aims at increasing market share for present products or services in present markets through greater marketing efforts Market penetration includes increasing the number of sales person, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts.

Select strategies

According to theory, the matching of the strategy formulation framework consists of five techniques: the SWOTOWS matrix, the SPACE matrix, the BCG matrix, the IE matrix, and the Grand strategy matrix The author chooses SWOTOWS matrix to find out appropriate strategies.

Figure 4.315 : SWO T OWS matrix for Vinacafe

5 Skilled and experienced staffs in growing.

1 Market is expanded and tariff is lower when VN joints WTO

- Market penetration + Increase sales in the current market

+ Come closer to the end buyers or consumers.

+ Establish rep office or branches abroad.

5 Incentive policies to be reduced or eliminated

- Low cost + Advantages of low cost producers

+ Increase export volume to take advantages of economies of scale.

- Restructuring + Decentralizing + Power empowerment + More controlling + Training

Figure 4.4Table 6 : The Quantitative Strategic Planning Matrix for Vinacafe – QSPM

Market development Market penetration Forward intergrationinte gration

Key factor Wei ght AS TAS AS TAS AS TAS AS TAS AS TAS

1 Market is expanded and tariff is lower

3 Incentive policies to be eliminated

Note: AS: Attractiveness Score; TAS: Total Attractiveness Score

Attractiveness Score: 1= not attractive; 2= somewhat attracttiveattractive; 3= resonablyreasonably attractive; 4= highly attractive

The Quantitative Strategic Planning Matrix shows the prioritized list of strategies is as follows:

2 Market penetration: Increase sales in the current markets

3 Low cost: Maintain its price competitiveness.

4 Market development: Find new markets for Vinacafe’s coffee.

Coffee export strategy for Vinacafe

On the basic of the theory on strategic management, international trade strategy and theSWOT analysis, the author proposes coffee export strategy for Vinacafe including two important parts: marketing and restructuring as follows:

4.4.1.1 Products strategy i, Change products structure for export: As analyzed above that the current products structure of Vinacafe is not suitable for the market Arabica is more demanded and sold at higher price however it accounts for only 5% of total export Vinacafe should increase the export of Arabica beans by at lest 30% since this coffee is highly demanded in the international market ii, Diversify products for export: Vinacafe should focus on exporting more specialty coffee such as organic, 4C coffee, value added coffee to meet with diversified demand of the customers and get premium People in the developed countries tend to use more environment friendly products so that the opportunities for such types of coffee are high. iii, Improve product quality: The improvement of coffee quality is very important as it will improve Vinacafe’s image in international market Vinacafe applies properly and strictly quality management system according to international standard to improve its competitiveness and product’s prestige in the market The quality of raw beans are closely checked before entering into processing stage

Vinacafe should set up a concrete plan for the development of products with different quality from low to high to meet the demand of various customers Japanese customers usually require top quality however those from neighboring countries prefer cheaper products with reasonable quality.

In the context of competitive market, Vinacafe should pay due attention on the packaging, storage, transportation and delivery since it will have certain impact on product’s quality before reaching customers.

4.4.1.2 Market strategy i, Market development: Vinacafe exports coffee to only 40 countries and territories.However, there are now more than 180 countries in the world using coffee The potential for market development is big especially when Vietnam becomes a member of WTO. Vinacafe should promote its strength as a low cost producer together with the opportunity of reduced tariff in expanding new markets, such as: China, Eastern Europe and African countries It is expected that the demand for coffee in these markets would raise more than 10% per year. ii, Market penetration: This strategy aims at increasing market share for present products or services in present markets through greater marketing efforts Market penetration includes increasing the number of sales person, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts.

Although Vinacafe exports coffee to many countries and territories, it has no representative offices abroad so the marketing is very weak The potential for market development is big especially when Vietnam becomes a member of WTO Vinacafe should promote its strength as a low cost producer together with the opportunity of reduced tariff in expanding new markets, such as: China, Eastern Europe and African countries It is expected that the demand for coffee in these markets would raise more than 10% per year.

In many consuming countries, Vietnamese coffee accounts for only 5-10% For instant, in Japan, the third biggest coffee importer, Vietnam’s coffee accounts for only 8% of the total import to Japan Japanese market requires high quality and pays premium price Yet, Japan shares only 5% of Vinacafe’s coffee export The small volume of quantity exported to Japanese market showing that Vinacafe’s coffee quality is not so good or the marketing is still weak Vinacafe should try to increase the market share in traditional markets like Japan, EU or USA since it will cost less than developing new markets

Vinacafe should open representative offices in the key consuming markets like: US, Europe and Japan The representative office would collect information about the market, price, and demand…for coffee and handle all marketing activities such as: advertisement, sales promotion and even logistic.

Although Vietnam in general and Vinacafe in particular export big quantity of coffee to the international market However in many market the name and image of Vinacafe is not so popular Vinacafe should organize and implement promotion campaigns abroad, attend the international exhibitions and trade fair so that the image of Vinacafe can be more familiar with the customers. iii, Forward integration strategy

The value chain of coffee can be summarized as:

Producer – Processor – Local trader – Exporter – International Trader – Importer – Wholesaler – Roaster - Wholesaler – Retailer – Customers

In fact, one lot of coffee may go through several international traders before reaching the hand of the importer The long value chain reduces the margin for all stakeholders. According to statistic figures, the FOB value of coffee beans accounts only ten percent of the price of a cup of coffee It means that Vinacafe in its capacity as producer and exporter receives only small percentage of coffee’s value

How to deal with this problem and to increase its efficiency? The best answer is application of “forward integration” Vinacafe should not remain as an exporter It should go further down to the chain and try to sell coffee beans directly to the roasters and coffee products to retailers or even consumers The profit margin will increase and Vinacafe will understand more about the market as well as the taste of the consumers This can be done through rep offices or branches abroad or by bringing coffee to the custom bonded warehouse for retailing

Vinacafe should maintain as a low cost exporter because of the following reason:

Firstly, it is difficult to differentiate the coffee beans There are two main varieties of coffee: Arabica, accounting for 70% and Robusta, sharing 30% of the total Vietnam is aRobusta producer together with other countries like: Indonesia, Uganda, Brazil, and India Generally, it is not easy to distinguish Robusta coffee from each country since coffee is homogenous product All companies trade similar coffee, except some can offer slightly different products like washed, semi washed, polished, steamed coffee, as a result of modern processing facilities

Secondly, the buyer is price sensitive with high bargaining power in a perfect competitive market both locally and internationally The coffee market is absolutely liberated There are no substantial barriers to entering or leaving the industry With the fast developing of communication industry in Vietnam, the information is shared equally between seller and the buyers The exporters practice trading online with international traders through real time market information provided by Reuter, Bloomberg Not only the big exporters, small traders and individuals can access to the information through different sources: internet, telephone, radio and television The domestic price fluctuates depending on the price set by two future markets in London and New York Price in future market can change every five minutes, mean while in the local market it change four or five times a day In the future market, the quality of coffee is standardized so that buyers just focus on price In the context of supply excess demand, the seller from producing country is usually a price taker.

Thirdly, thanks to the advantages of natural climatic and soil conditions, the average yield of Vietnam’s coffee is one of the highest in the world That leads to reduce the production cost per ton of Vietnam’s coffee Vinacafe with long time experience in growing coffee has applied many technical advances in its plantations and therefore productions cost of Vinacafe is even lower

Finally, as a big producer and trader, Vinacafe can use the advantages of “Economies of scale” Unlike the other exporters, Vinacafe can export a big quantity within short period of time This advantage helps to reduce the average cost per one ton of coffee exported. That increases the competitiveness of Vinacafe’s products in the market It is our estimation that if Vinacafe increase its volume of coffee exports by 30% it can reduce the average cost by 15% However please be noted that, the cost is not always reduced when the volume is increased Vinacafe should calculate and balance the total marginal cost and benefit from its business activities.

PROPOSED MEASURES AND TIME FRAME TO……………… IMPLEMENT COFFEE EXPORT STRATEGY…………………………… ……77 5.1 Group of measures on human resources

Group of measures on marketing

The issue of improving coffee export quality is a synthetic plan consisting of all stages: production, harvesting, processing, storing and marketing

As for production: i, Expanding Arabica coffee production area with a view of changing the coffee products structure This measures originates from the theory “demand and supply in the market economy” In this context demand and supply to be considered not only in volume but also in structure, quality, price and place The recent studies show that in the USA, for example, demand for coffee keep increasing at nearly 10% in the next ten years (import tax

0%), but mainly for Arabica coffee The same trend can be seen in European market. Therefore Vinacafe should change its products structure at present 90% Robusta 10% Arabica to 70% Robusta and 30% Arabica by 2015, and in the long run it should be 50/50 ii, Implementing intensive farming in the existing coffee area to increase yield and so reduce the production cost Special attention on selection and creation of good hybrid and high quality variety that can be resistant at leaf rust diseases should be paid to It is expected that about 50% of Vinacafe’s plantation to be replaced with this hybrid by the year 2020 iii, Strengthening agricultural extension works and transferring of modern farming technique in coffee plantation The farming criteria of Common Code for Coffee Community (4C) to be applied in 30% of Vinacafe’s coffee plantation by the year 2015. iv, Because harvest has a direct impact on the coffee quality the collecting techniques need to be properly applied This is to ensure that only ripe cherry to be harvested The mature cherry will then give the coffee liquor attractive flavor and taste. The bad habit of collecting green cherry or unripe cherry need to be reduced or eliminated by the year 2020 The coffee quality will therefore be improved.

As for processing: i, Although Vinacafe is the biggest coffee exporters in Vietnam Its main processing facilities are old and out of date This leads to unstable coffee quality If the quality of raw beans is not stable the roasters have to change the formula of blending and cannot secure the final quality of the products Beside, coffee is the seasonal products It is harvest only one time a year It requires big processing capacity since the machines are only used for a short period of two or three months If the processing capacity is low the quality of coffee are much affected Vinacafe should apply full wash processing method for Arabica coffee and dry processing method for Robusta coffee Wet processing can be used for a small volume of Robusta coffee to produce the washed Robusta that can earn premium It is advisable to build up one factory in Daklak province and another inLamdong province each with capacity of 50,000 ton per year The investment for that is estimated at 10 million USD each and need to be finished by the end of 2015 ii, The warehouse and storage of coffee is also very important Coffee is usually stored in term of parchment coffee The moisture content should be kept at minimum to maintain the quality and avoid mould formation Vinacafe should invest in building up of 500,000 m2 of drying yard and 50 dryers so that it can secure to dry some 200,000 tons of coffee a year The investment is approximately 12 millions USD and to be finalized by 2020 iii, Not only preliminary processing, the value added processing should also be paid attention to Value added processing requires big amount of investment however it can generate a good return for Vinacafe Vinacafe can use its good raw beans to produce high premium coffee products such as: roast and ground, instant coffee By producing these products Vinacafe can increase its export revenues The market for value added coffee products is expanding therefore Vinacafe need to invest in this good return industry It is expected that Vinacafe should invest some 30 millions USD to build two big instant coffee in Daklak and Binh Duong, one with spray dried technology and the other with freeze dried technology by 2015 to increase the value of coffee export by 30%

5 2.2 Establish rep offices in USA and Germany

As explained in the above chapter that although Vinacafe exports its coffee to about 40 countries and territories it has no representative offices abroad In many consuming countries, Vietnamese coffee accounts for only 5-10% and in which Vinacafe share very small percentage It is proposed to establish representative offices in the USA and Germany USA is an important market for coffee and it imports some 20% of total world’s coffee Moreover the USA imports big quantity of Robusta coffee which is the main coffee products of Vinacafe The representative office in Europe should be set up in Germany, the biggest coffee importer market and the gate to European market by 2012.

The representative offices are to collect the market information and act a bridge between the exporters and importers and consumers It also works out and implements marketing programs and promotion campaign for Vinacafe’s coffee The logistic abroad is another task of the rep offices It is advisable that Vinacafe should open the rep office in these markets as soon as possible.

Vinacafe needs to understand clearly about the law and regulation of trading coffee in these markets: taxation, non tax barriers, custom and practice In the USA the law is very complicated and need to have a deep understanding before starting any business The experience from settlement of disputes on coffee export contracts occurred between Vinacafe and some international traders requires Vinacafe to improve its people’s knowledge on international laws and practices as well as understand more deeply the business partners before concluding the contracts

5 2.4 Build up custom bonded warehouses in the USA and Germany

It is also advised to build up custom bonded warehouses in the USA and Germany The main customers of Vinacafe’s coffee are medium and small size roasters They do not need big quantity at one time but regular supply with small quantity just to meet their production needs Taking into account that the time of transportation of containers from Vietnam’s ports to European port is about one month, and the time to US port even longer, the proposal is to build up on the spot warehouse Vinacafe needs to build warehouse using modern technology: automatic scales and mixing so that it can meet with the requirement

“regular supply and stable quantity” of the roasters The capacity of each warehouse is 15,000 tons and to be finished by 2015.

It is necessary for Vinacafe to organize and implement marketing activities in the key foreign markets: USA, EU and Japan The regular participation of international coffee trade fairs and exhibitions would help Vinacafe increase its image in these markets The food and drinks festivals in some European countries are ideal opportunities for Vinacafe to introduce its self and promote its products sales

Registration to protect the trademark and trade name in the international market is also important task for Vinacafe This is to avoid the case of Trung Nguyen coffee in the US market In the USA, the registration cost for trademark is only USD1,200 – 1,500.However the cost for purchasing a registered trademark is much more expenses several hundred of thousand dollars depending on mutual agreement of the two parties The registration should be completed by 2015.

Group of measure on management

Vinacafe has now 7 export companies and many times it happens internal competition and duplication It is advisable to allocate the region for each company to avoid such competitions For instant, Vinacafe Buon Ma Thuot is in charge of purchasing coffee from Daklak and Gialai provinces meanwhile Vinacafe Dalat focus on Lam Dong and Dong Nai provinces The export import division under head office of the GC should also has separate marketing and sales teams dedicated to US market, Eastern Europe, Western Europe, Japan… The operation charter needs to be amended toward decentralization so to give more power and autonomy to the lower level of the GC The new charter should be prepared as soon as possible and finalized by 2011.

Participating at the future markets such as LIFFE or NYBOT is advisable to minimize trading risks Hedging is an effective risk management tools All big international coffee traders use hedging in their daily coffee business Vinacafe should send officials abroad for training about risk management and apply in its trading activities The hedging should be commenced by coffee crop 2010 – 2011.

In the above chapter the strategy selected is restructuring Vinacafe’s mamagement and increasing the sales in the existing markets:USA, Europe and Japan The mesures to implement the stratergies are proposed as follows:

5.1 Establishment of Representatvie offices in the key markets:

Structure of thesis

Apart from the acknowledgement, table of content, executive summary, introduction, conclusion, references and appendix, the main body of the thesis is divided in to 53 chapters as follows:

This chapter gives a quick look at the theoretical framework of the thesis

Chapter 32: Analyzing Strengths and Weaknesses of Vinacafe's coffee exports

This chapter presents all research findings about opportunities, threats, strengths and weaknesses of Vinacafe's coffee exports, critical success factors and its most challenges.

Chapter 3: Analyzing Opportunities and Threats of Vinacafe's coffee exports

THEORETICAL BACKGROUND

SWOT analysis

SWOT analysis is a strategic planning tool used to evaluate the Strengths,Weaknesses, Opportunities, and Threats involved in a project or in a business venture It involves specifying the objectives of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective The technique is credited to Albert Humphrey, who led a research project at Stanford University in the 1960s and 1970s using date from Fortune 500 companies.

In general, a business unit has to monitor key macro environment forces (demographic-economic, technological, political-legal, and social-cultural) and microenvironment actors (customers, competitors, distributors, and suppliers) that affects its abilities to earn profit.

Disadvantages of proposition? Gaps in capabilities? Lack of competitive strength? Reputation,presence and reach? Financials? Own known vulnerabilities? distribution, awareness?

Timescales, deadlines and pressures? Cash flow, start-up cash- drain? Continuity, supply chain robustness? Effects on core activities, distraction? Reliability of data, plan predictability? Morale, commitment, leadership? Accreditations, etc?

Processes and systems, etc? Management cover,succession?

Tactics: eg, surprise, major contracts?

Political effects? Legislative effects? Environmental effects? IT developments? Competitor intentions - various? Market demand? New technologies, services, ideas? Vital contracts and partners? Sustaining internal capabilities? Obstacles faced? Insurmountabl e weaknesses? Loss of key staff?

Economy - home, abroad? Seasonality, weather effects?

Figure 3: Diagram of SWOT business

Then, for each trend of development, management needs to identify the associated opportunities and threats.

The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives

- Strength attributes of the organization that are helpful to achieving the objectives.

- Weaknesses attributes of the organization that is harmful to achieving the objectives.

What may represent strengths with respect to one objective may be weakness for another objective The factors may include all of the 4P's as well as personnel, finance, manufacturing capabilities, and so on

The external factors may include macroeconomic matters, technological change, legislation, and socio-cultural changes, as well as changes in the marketplace or competitive position Opportunities are external conditions that are helpful to achieving the objective Threats are externals conditions that are harmful to achieving the objective.

SWOT analysis is just one method of categorization and has its own weaknesses For example, it may tend to persuade companies to compile lists rather than think about what is actually important in achieving objectives It also presents the resulting lists uncritically and without clear prioritization so that, for example, weak opportunities may appear to balance strong threats.

Porter’s five force models

Model provides a simple perspective for assessing and analyzing the competitive strength and position of a corporation competitive position or business organization. Porter’s Five forces model can be used to good analytical affect alongside other models such as the SWOT and PEST analysis tools.

Figure 4: Porter’s five force model

Buyer power influences the price firms can charge, for example, as does that threat of substitution The power of buyers can also influence cost and investment, because powerful buyer demands costly service The bargaining power of suppliers determines the costs of raw materials and other inputs The intensity of rival influences prices as well as the costs of competing in areas such as plant, product development, advertising and sales force The threat of entry places a limit on prices and shapes the investment required to deter entrant The strength of each the five competitive forces is a function of industry structure, or the underlying economic and technical characteristics of an industry.

Rivalry among competing firms: Rivalry among competing firms is usually the most powerful of the five competitive forces Rival often occurs in an industry because firms either feels the pressure of see the opportunities to improve position The intensity of rivalry among competing firms tends to increase as the number of competitors increases, as competitors become more equal in size and capability, as demand for the industry's products declines, and as price cutting becomes common. Rivalry also increase when consumers can switch brands easily; when barriers to leaving the marker are high; when fixed costs are high; when products is perishable; and when merges and acquisitions are common in the industry

Potential entry of new competitors: A new entrant into an industry represents a competitive threat to existing firms; it adds production capacity and the potential to erode the market share of existing competitors Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms increases. Barriers to entry, however, can include the need to gain economies of scale quickly, the need to gain technology and specialized know how, the lack of experience, strong customer’s loyalties, strong brand preferences

Potential development of substitute products: In many industries, firms are in close competition with producers of substitute products in other industry Substitutes limit the potential returns of an industry by placing a ceiling on the prices that can be charged before consumers will switch to the substitute product.

Bargaining power of suppliers: The bargaining power of suppliers affects the intensity of competition in an industry, especially when there is a large number of suppliers, when there are only a few good substitute raw materials, or when the cost of switching raw materials is especially costly It is often in the best interests of both suppliers and producers to assist each other with reasonable prices, improved quality, development of new services, just in time deliveries, and reduced inventory costs, thus enhancing long term profitability for all concerned.

Bargaining power of customers: When customers are concentrated or large, or buy in volume, their bargaining power represents a major force affecting the intensity of competition in an industry Buyers of an industry’s product can exert bargaining power over that industry by forcing prices down, by reducing the amount of commodities they purchase from the industry, or by demanding better quality for the same price.

Porter’s generic models

The primary determinant of a firm's profitability is the attractiveness of the industry in which it operates The secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns To create distinguish competences of one firm in the markets, it is vital to design strategies that can exploit fully its internal capabilities as well as mobilize the resources of other company in the whole value system to deliver greater value to the customer

Source: Competitive StrategyMichael Porter argued in his Competitive Strategy established in 1980 that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation.

By applying these strengths in either a broad or narrow scope, three generic strategy result: cost leadership, differentiation and focus

Cost leadership strategy: This strategy emphasizes producing standardized products at a very low per unit cost for consumers who are price-sensitive By producing high volumes of standardize products the firm hopes to take the advantage of economies of scales and experience curve effects The firms sell its products either at average industry prices to earn a profit higher than that of rivals or below the average industry prices to gain market chare In the event of a price war, the firm can maintain some portability while the competition suffers losses Even without a price war, because the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time The cost leadership strategy usually targets a broad market

Some of the ways that firms acquires cost advantages are by improving process efficiencies, gaining unique access to a large sources of cheaper materials, making optimal outsourcing and vertical integration decisions, or avoiding some cost altogether.

Striving to be the low cost producers in an industry can be specially effective when the market is composed on many price sensitive customers, when there are few ways to achieve products differentiation, when buyers do not much care about differences brands to brands, or when there are a larger b\number of buyers with significant bargaining power

The strategy however has its own risk For example, other firms may be able to lower their cost as well As technology improves, the competition may be able to leapfrog the production capability, thus eliminating the competitive advantages Or buyer interest may swing to other differentiating feature besides prices

Differentiation strategy: Differentiation strategy involves the development of a products or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition The value added by the uniqueness of the products may allow the firm to charge a premium price for it The firms hope that the higher price will more than cover the extra costs incurred in offering the unique product Because customers see the products as unrivaled and unequaled, the price elasticity of demand tends to be reduced and customers tend to be more brands loyal This can provide considerable insulation from competition

To maintain this strategy the firms should acquire strong coordination among the research & development and marketing functions and substantial amenities to attract highly skilled scientists and creative people

The risks associated with this strategy include imitation by competitors and changes in customers taste In this case the unique product may not be valued highly enough by customers to justify the higher price Firms should find durable sources of uniqueness that can not be imitated quickly or cheaply by competition

Focus strategy: A focus strategy concentrates on a narrow competitive scope and within that segment attempts to achieve either a cost advantages or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it A firm using a focus strategy often has a high degree of consumer's loyalty, and this entrenched loyalty discourages other firms from directly competing Because only one firm can differentiate itself with the lowest cost, the remaining firms in the industry must find other ways to differentiate their products

This strategy is most effective when consumers have distinctive preferences or requirement and in the event that the completions are not attempting to specialize in the same targets segment Risk of pursuing a focus strategy includes the possibility of imitation and changes in the target segments Further more, it may be fairly easy for a broad market cost leader to adapt its products in order to compete directly Finally,other focuser may be able to carve out sub-segments that they can serve even better.

ANALYZING OPPORTUNITIES AND THREATS OF

CHAPTER I: THEORETICAL BACKGROUND CHAPTER 2: THEORETICAL BACKGROUND