LV Thạc sỹ_Building up a coffee export strategy for Vinacafe

Chapter 1: Introduction Chapter 2: Theoretical background This chapter gives a quick look at the theoretical framework of the thesis Chapter 3: Analyzing Vinacafes coffee exports This chapter presents all research findings about opportunities, threats, strengths and weaknesses of Vinacafes coffee exports, critical success factors and its most challenges Chapter 4: Coffee export strategy for Vinacafe This chapter provides authors recommendations to formulate appropriate coffee export strategy for Vinacafe in the context of globalization. Chapter 5: Proposed measures and time frame to implement strategy This chapter provides authors recommendations to set up an implementation framework for Vinacafe

NEU BUSINESS SCHOOL

CHAPTER 1: INTRODUCTION 1.1 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 only100,000 tons in the early 90's to above 1 million tons in 2008, bring in more than USD 1.6billions to the country Vietnam becomes the second biggest coffee exporter in the world, justafter Brazil

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70 coffee producing countries worldwide The rivalry isvery strong in terms of quality and price Some countries have withdrawn from this fearcompetition since they do not have competitive advantages

Vinacafe is the biggest state owned corporation specialized in producing, processing andtrading 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 andproduced 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 VND8,500 billions

Vinacafe’s coffee export accounts for some 20% of the total country However, its share isdecreasing and more important the export efficiency is low The Corporation suffered lossesduring the recent years The fact requires Vinacafe to find out the way to overcome thedifficulty and to ensure its survival and prosperity in the coffee market

1.2 Problem statements

i, 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 thetotal export of Vietnam

conflict objectives and cannot decide which the priority is That leads to internal competitionoccurred between its member companies reduces the business efficiency of each company andentire corporation.

1.3 Research objectives

To formulate appropriate and efficient coffee export strategy for Vinacafe In order to obtainthis target objective the thesis focuses on following objectives:

- 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 formulate appropriate strategy for Vinacafe and propose measures to implement

1.4 Research questions

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

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

1.5 Research methodology

Research methodology is combined of qualitative and quantitative methods, data collectedinclude both of primary and secondary

The primary data and information are obtained from:

- In-depth interviews with BOM of Vinacafe, Vicofa,

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

- Questionnaires delivered to Directors of Vinacafe's export member companies andcoffee importers

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

1.6 The scope, expected results and limitation of the thesis

i, The scope: The author focuses on analyzing Vinacafe's internal and external environment tofind out the opportunities and threats as well as its internal strengths and weaknesses, critical

ii, Expected results: The expected results are as follows:

- To provide an overview of Vinacafe and its coffee export activities

- To understand the external and internal factors that effect on Vinacafe's coffee export

- To formulate appropriate coffee export strategy for Vinacafe

iii, Limitation: Because of the time and limited access to relevant MARD, MOIT and topmanagers of coffee exporters and importers, the thesis has been heavily based on secondaryliterature and data to formulate the export strategy

1.7 Structure of thesis

Apart from the acknowledgement, table of content, executive summary, conclusion,references and appendix, the main body of the thesis is divided in to 5 chapters as follows:

Chapter 1: Introduction

Chapter 2: Theoretical background

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

Chapter 3: Analyzing Vinacafe's coffee exports

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

Chapter 4: Coffee export strategy for Vinacafe

This chapter provides author's recommendations to formulate appropriate coffee exportstrategy for Vinacafe in the context of globalization

Chapter 5: Proposed measures and time frame to implement strategy

This chapter provides author's recommendations to set up an implementation framework forVinacafe

1.1 Rationale 3

1.2 Problem statements 3

1.3 Research objectives 4

1.4 Research questions 4

1.5 Research methodology 4

1.6 The scope, expected results and limitation of the thesis 4

1.7 Structure of thesis 5

APPENDICES ……….…97

96 27

ACKNOWLEDGEMENT 28

ABBREVIATIONS 29

LIST OF TABLES 30

LIST OF FIGURES 31

ABBRIVIATION 32

ACKNOWLEDGEMENT 34

EXECUTIVE SUMMARY 2

CHAPTER 1: INTRODUCTION 9

1.1 Rationale 9

1.2 Problem statements 9

- Vinacafe does not diversify its products for export Its main export items are mainstream green coffee beans with lower value 10

- Vinacafe does not use its resources effectively to compete successfully in the international coffee market 10

1.3 Research objectives: 10

1.4 Research questions: 10

1.5 Research methodology 11

1.6 The scope, expected results and limitation of the thesis: 11

7 Structure of thesis:1.7 Structure of thesis 12

14

2.1 Strategic management: 14

2.1.1 Definition: 14

14

2.1.2 Stages of strategic management: 14

21.1.3 Process of formulating business strategy 15

Bargaining power of Suppliers 19

Bargaining power of Customers 19

2.2 International trade management: 32

2.2.1 The role of international trade: 32

2.2.2 International trade strategy: 32

Summary of Chapter 2 35

1.2 SWOT analysis: 35

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 35

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: 36

- Internal factor: The strengths and weaknesses internal to the organization 36

- External factor: The opportunities and threats presented by the external environment 36

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 36

Criteria examples 36

Advantages of proposition? 36

Capabilities? 36

Competitive advantages? 36

USP's (unique selling points)? 36

Resources, Assets, People? 36

Experience, knowledge, data? 36

Financial reserves, likely returns? 36

Marketing - reach, distribution, awareness? 36

Innovative aspects? 37

Location and geographical? 37

Price, value, quality? 37

Accreditations, qualifications, certifications? 37

Processes, systems, IT, communications? 37

Cultural, attitudinal, behavioral? 37

Management cover, succession? 37

Philosophy and values? 37

Strengths 36

Weaknesses 36

Criteria examples 36

Disadvantages of proposition? 36

Gaps in capabilities? 36

Lack of competitive strength? 36

Reputation, presence and reach? 36

Financials? 36

Own known vulnerabilities? 36

Timescales, deadlines and pressures? 36

Cash flow, start-up cash-drain? 37

Continuity, supply chain robustness? 37

Effects on core activities, distraction? 37

Reliability of data, plan predictability? 37

Morale, commitment, leadership? 37

Accreditations, etc? 37

Criteria examples 38

Market developments? 38

Competitors' vulnerabilities? 38

Industry or lifestyle trends? 38

Technology development and innovation? 38

Global influences? 38

New markets, vertical, horizontal? 38

Niche target markets? 38

Geographical, export, import? 38

New USP's? 38

Tactics: eg, surprise, major contracts? 38

Business and product development? 38

Information and research? 38

Partnerships, agencies, distribution? 38

Volumes, production, economies? 38

Seasonal, weather, fashion influences? 38

Opportunities 38

Threats 38

Criteria examples 38

Political effects? 38

Legislative effects? 38

Environmental effects? 38

IT developments? 38

Competitor intentions - various? 38

Market demand? 38

New technologies, services, ideas? 38

Vital contracts and partners? 38

Sustaining internal capabilities? 38

Obstacles faced? 38

Insurmountable weaknesses? 38

Loss of key staff? 38

Sustainable financial backing? 38

Economy - home, abroad? 38

Seasonality, weather effects? 38

Figure 3: Diagram of SWOT business 38

Source: SWOT analysis template 38

Then, for each trend of development, management needs to identify the associated opportunities and threats 39

The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives 39

- Strength attributes of the organization that are helpful to achieving the objectives .39

- Weaknesses attributes of the organization that is harmful to achieving the objectives 39

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 39

competitive position Opportunities are external conditions that are helpful to

achieving the objective Threats are externals conditions that are harmful to

achieving the objective 39

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 39

1.3 Porter’s five force models 39

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 39

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 40

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 40

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 40

Figure 4: Porter’s five force model 40

Bargaining power of Suppliers 40

Bargaining power of Customers 40

Source: Competitive Strategy 41

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 41

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 41 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

customer’s loyalties, strong brand preferences 41

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 41

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 42

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 42

1.4 Porter’s generic models: 43

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 43

Figure 5: Porter’s generic model 43

Target Scope 43

Advantage 43

Low Cost 43

Product Uniqueness 43

Broad (Industry Wide) 43

Cost Leadership Strategy 43

Differentiation Strategy 43

Narrow (Market Segment) 43

Focus Strategy (low cost) 43

Focus Strategy (differentiation) 43

Source: Competitive Strategy 43

Michael 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 43 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

more cheaply will remain profitable for a longer period of time The cost leadership

strategy usually targets a broad market 44

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 44

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 44

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 44

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 44

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 45

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 45

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 45

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 .45

CHAPTER 2: ANALYZING STRENGTHS AND WEAKNESSES OF 46

THE COFFEE EXPORT OF VINACAFE 46

32.1 Overview of Organization structure and main activities of Vinacafe 46

3.1.2 Exporting companies 49

Every farm under of Vinacafe has its own processing facilities 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 350,000 MT of coffee beans a year 49

Most of the processing equipments are local made However 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 49

Every year Vinacafe export more than 200,000 MT of green beans to many countries in the world Beside its own produced beans, Vinacafe purchase coffee from other producers in the region The export performance of Vinacafe will be analyzed more detail in the following part 49

2.1.3 Plantation Enterprises 50

3.1.3 Plantation enterprises 50

Every year about 35,000 MT of coffee beans are produced by these farms 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 the 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 50

At December 2007, Vinacafe controlled some 29,000 ha: 50

· Coffee 19,639 ha – produced 32,580 tonnes of coffee 50

· Rice 4,322 ha – produced 25,190 tonnes of rice 50

· Sugar 2,800 ha 50

· Rubber 800 ha 50

· Cassava 472 ha 50

· Cashew nuts 323 ha 50

On this State land, ‘employees’ grow products in return for a pre-agreed quantity of coffee or other products, and the farmers are free to sell the excess In reality therefore, it is not the SOEs that are farming these plantations, but the individual employees, who are paying a form of ‘lease payment’ denominated in coffee or other products This payment is related to the depreciation borne by the SOEs on the assets (principally coffee trees) that are being used by the farmers, plus, in some cases inputs such as the employees’ salary, fertilisers, insecticides, irrigation and a management fee This has the effect of leveraging Vinacafe’s results, in that in a year of low prices, this is exacerbated by low ‘rents’ received, and vice versa The combination of low coffee prices combined with the current contracting system has resulted in the plantations generating the main portion of the losses within the group over the past four years 51

During 2007, the Vinacafe plantations produced 32,580 tonnes of coffee from its own plantations, but the exporting enterprises exported a total of more than 220,000 tonnes, so the plantations are producing less than 15% of the coffee that is exported by the group 51

2.1.4 Coffee Product Companies 51

3.2 External analysis 52

3.2.1 Macro-environment analysis: 52

3.2.2 Micro-environment analysis 59

3.3 Internal analysis: 67

3.3.1 Production: 67

3.3.2 Processing 68

3.3.3 Marketing 69

3.3.4 Coffee export performance 73

3.3.5 Human resources 81

3.3.6 Financial resources 82

3.4 SWOT table 83

3.4.1.Strengths 83

3.4.2 Weaknesses 84

3.4.3 Opportunities 84

3.4.4 Threats 85

Summary of Chapter 3 85

2.2 Vinacafe's coffee export performance 86

2.2.1 Main coffee export item: 86

Coffee beans: 86

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 86

Figures 7: Categories of exported coffee from producing countries 86

86

Source: Coffee exporter’s guide 2002 86

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 86

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 86

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 87

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 87

Table 1: Vinacafe’s Coffee Grade 87

Crop 87

Grade 87

02/03 87

03/04 87

04/05 87

Grade 1 (%) 87

18 87

20 87

22 87

22 87

24 87

Grade 2 A (%) 87

45 87

50 87

53 87

58 87

60 87

Grade 2 B (%) 87

27 87

21 87

18 87

12 87

10 87

Grade 3 (%) 87

10 87

9 87

7 87

8 87

6 87

Source: Vinacafe 87

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 87

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 87

Processed coffee: 88

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 88 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

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 88

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 89

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 89

A structured relationship with an international roaster will serve well to develop sound but aggressive marketing techniques, with modern roasting and packaging, to supply quality products Prior to any substantial new investment in coffee products for regional export, a market assessment and feasibility study will be required This should be undertaken as soon as possible as the timing is crucial and the opportunity likely to be short lived 89

2.2.2 Coffee export volume: 89

Vinacafe is the first company in Viet Nam to export coffee beans Before 1990 the export of coffee beans had been assigned by Government to some companies only The main export market was former socialist countries including USSR and other Eastern Europe countries The export had been carried out in accordance with the plan set by the Government’s protocols and quota The payment had been made in kinds such as: petroleum, fertilizer, insecticides and other agricultural materials.89 From 1990 -1998: The export of coffee had been slightly liberated All the companies were eligible to export coffee if met with the following requirement: 89

- Being a member of Vietnam Coffee and Cocoa Association 90

- Having warehouse and processing facilities of at least 5,000MT a year 90

- Having adequate experienced staff, financial ability and markets 90 Since 1998 the export of coffee beans had been liberated All the companies that had business registration of exporting coffee beans were allowed to export coffee

producers or local traders reprocess at its own processing facilities and export 90

Figure 8: Vinacafe’s coffee export by year 90

90

90

Source: Vinacafe 90

The export of coffee of Vinacafe kept in increasing in concurrently with the development of total production in Vietnam In 2001 the export volume reached the highest level of nearly 300,000 MT however the export turnover was only USD 114,744,000 far lower than the other years since the price down to the lowest level.90 Since then the export volume of Vinacafe fluctuated in the range 200,000 -230,000 MT a year The export value increased because the export price gradually rebound In fact the international price rose much higher however the FOB price remain still low 90

Vinacafe Buon Ma Thuot is the biggest exporter under Vinacafe It accounts for 60-70% of the total export of the GC Maxcopex ranks the second position and Vinacafe Nha Trang is the third Vinacafe Buon Ma Thuot maintains its market share meanwhile other exporters lose market share, presumably due to an inability to finance their trade 90

Table 2: Coffee export of Vinacafe’s member companies 91

91

Source: Vinacafe 91

In terms of volume, Vinacafe’s coffee accounted for some 20-25% of total coffee export of Viet Nam However this percentage tends to be declined in the recent years despite the fact the Vinacafe has tried to secure its export share 91

Figure 9: Comparison of coffee export between Vinacafe and Vietnam 91

Source: Vinacafe and Vicofa 91

2.2.3 Vinacafe’s coffee market: 92

Most of Vinacafe’s products are for export Only 5% of Vinacafe’s total production is for local consumption Vinacafe’s coffee has been being exported to more than 40 countries in the world The main markets are USA (16%), Europe (65%) and Japan (5%) 92

Figure 10: Coffee market of Vinacafe 92

Source: Vinacafe 92

US market: United States is the biggest market for coffee in the world It accounted for 21% of world gross imports in 2007; the equivalent figure was 69% in 1947, 44% in 1968 and 18% in 1994 Main green beans suppliers were: Colombia 17%, Vietnam 15%, Brazil 15%, Guatemala 11% and Mexico 10% Estimated shares in 2007 green bean imports from producing countries were: Arabica 76%; Robusta 24% 92

The consumption of coffee fluctuates sharply in this market In recent years the consumption growth rate has been low meanwhile much higher in the other markets The average consumption of the US inhabitant reduced from 7.7 kg/head in 1983 to 4.5 kg/head in 1990 92

Because of high income the US require high quality of coffee In the period 1985 – 1995, Vinacafe’s coffee export to the US was small and the coffee had to be exported through intermediary countries such as Singapore, Malaysia… Since 1995 when the US lifted trade embargo against Vietnam, the quantity of coffee exported to the US has been increasing quickly 92

Staburks and Nestle 93

In 2005 the coffee export from Vietnam to the US has doubled in comparison with

1999 and reached 90,700 tons valued at USD57.8 millions The United States become the biggest customer of Vietnamese coffee in general and Vinacafe’s coffee in

particular 93 The EU market: 93 Consumption of coffee in the European Union (EU) has been relatively flat over the past five or six years both on an aggregate level and per head The International Coffee Organization estimates that, overall, the EU consumed 2.4 million tons or almost 45% of the consumption in all importing countries in 2006 This compares with the 1996 total of 2.2 million tons 93 Within the EU, Germany continues to be the largest consumer of coffee, accounting for approximately 600,000 tons but this is almost 5% lower than the 630,000 tons it consumed in 1997 France comes second with consumption estimated at around 400,000 tons, roughly the same as the year before but 3,5% up on the 2005 figure, while Italy is third, consuming 390,000 tons in 2007, the highest figure ever recorded for Italy 93 Green beans imports are identified by countries are as follows: 93 Belgium: Consumption per head in 2005: 5.0 kg, down from 6.4 kg in 1995 Belgium imported 200,000 tons in 2007 from Brazil, Colombia, Vietnam, Guatemala and Uganda In which, Brazil led with 21% Also Belgium imported roasted coffee with the quantity of 30,000 tons and exported 120,000 tons, mostly in Western Europe Vinacafe set up direct business relation with some big Belgium buyers such as Sara Lee 93 France: With population more than 60 millions and consumption per head 5.5 kg per year, France imported 400,000 tons in 2006 Brazil, Vietnam, Colombia and

Cameroon represented 66% of total green bean imports Estimated shares: Arabica 51% and Robusta 49% The biggest importers of Vinacafe’s coffee are Louis Dreifus and Sucre Export SA 94 Germany: In 2007 Germany imported approximately 800,000 tons, Brazil led with 25% Brazil, Vietnam, Colombia, Indonesia and Peru represented 63% of total green bean imports Robusta shared only 24% mean while Arabica accounted for 76% Germany imported 42,000 tons and exported 240,000 tons of processed coffee

including 96,000 tons of decaffeinated green beans The consumption per head was 6.7 g in 2007 down from7.4 g in 2005 Espresso coffee gaining popularity, mostly imported form Italy, and decaffeinated coffee holds 11% of the market Vinacafe export mostly its coffee to two big roasters: Kraft Foods and Tchibo 94 Italy: Consumption per head in 2006: 5.4 kg, up from 4.8 kg in 1995 2006 green bean imports were 350,000 tons; Brazil led with 29%, in which Arabica 56% and Robusta 44% Imports of processed coffee were 23,000 tons; exports were 60,000 tons of which 97% were roasted coffee It is estimated that Germany buys 30% of Italian exports of roasted coffee and Greece 17% Brazil, Vietnam, Cameroon, India and Cote d’ivoire represented 69% of total green bean imports Five roasters, of which Lavazza is the biggest, account for more than70% of the market Vinacafe exports its coffee indirectly to Lavazza 94 Netherlands: With population of 18 millions and consumption per head in 2006 was 6,6 kg down from 7,2 kg in 2000 and 8,9 kg in 1995 the Netherlands imported

150,000 tons of green beans, Brazil led with 24% Brazil, Uganda, Colombia,

were 6,000 tons Sara Lee/DE dominates the market with more than two thirds of all coffee sales Vinacafe sells its coffee mostly to Andira 94 Spain: In 2006, Spain imported 240,000 tons of green bean, Vietnam led with 30% Vietnam, Brazil, Uganda and Colombia represented 72% of all green bean imports (of which Colombia 6%) Estimated shares: Arabica 44% and Robusta 56%

Consumption per head in 2006: 4.7 kg, up from 4.2 kg in 1995 Imports of processed coffee were 12,000 tons meanwhile exports were 30,000 tons Top three rosters

control 60% of the market Some 300 smaller roasters cover 40% and dominate the out-of-home market where espresso is in high demand Spain import mostly Robusta

to produce Torrefacto Torrefacto itself is made from roasting regular coffee with sugar Mezclas, blends of torrefacto and regular coffee, account for about half of the market Vinacafe’s biggest customer in Spain is Icona 95 United Kingdom: Vietnam is the biggest supplier of coffee beans to the UK Vietnam, Brazil, Colombia, Indonesia and Mexico (of which Vietnam 33%) represented 70%

of total green bean imports, of which 53% was Arabica, 46% was Robusta and 1% was not specified UK imported 140,000 tons of green beans in 2006 95 However a further 70,000 tons of processed coffee were imported as well, almost half from Germany, and gross total 2006 imports were estimated at just over 200,000 tons Re exports were just over 12,000 tons The consumption per head was 2.3 kg in

2005, the same as in 1995 Soluble coffee accounts for 87% of the market by value with roast and ground at just 13% The United Kingdom hot beverage market continues to be dominated by tea Nestle accounts for around 50% of the market, Kraft Foods just over 20% ED and Fman is the biggest customer of Vinacafe in this market 95 Japanese market: Japanese demand has been growing at an average of close to 2% a year for the last decade That is approximately double the pace of growth seen in the other importing countries over the same period and has secured coffee’s place as the number two beverage behind tea 95 Japanese coffee consumers now drink on average 11 cups per week, up from 7.4 cups per week in 1990 Roast coffee is becoming more popular whereas instant coffee, which has been in serious decline for many years, appears to have bottomed out Consumption of canned coffee fell back slightly in 2005 and 2006 but remains the most popular form of consumption among the young 95 With the population of 130 million Japan imported 400.000 tons of coffee beans and about 50,000 tons of roasted and soluble coffee Main suppliers are: Brazil 26%, Colombia 17%, Indonesia 16%, Guatemala and Vietnam each 7%, Ethiopia 6% Arabica shares 73% and Robusta shares only 27% The instant coffee market is dominated by two processors, Nestle and AGF, who between them account for

approximately 99% of domestic production Excluding the industrial market,

Nescafe is the top brand, accounting for 72% of the branded instant coffee market About 11%-12% of the overall instant coffee market is for industrial use in such products as canned and liquid coffee Both Robusta and Arabica of Vinacafe have been being exported to AGF, Key Coffee, Mitsui, Itochu,… 96 China: China (population about 1.3 billion) is a producer as well as a consumer Detailed statistics on the internal coffee consumption are not readily available but all the indicators suggest that it has grown rapidly over the past ten years or so Gross import in 2006 reported by International Coffee Organization totaled 200,000 tons, although the true figure is probably much higher as not all the imports of coffee

leaving approximately 165,000 tons net imports This, together with internal

production and unreported imports, suggests that consumption may have been growing by as high as 300,000 tons in 2008 Furthermore the International Coffee Organization suggests that consumption may have been growing by as much as 20%

a year since 1998 96

Most of China’s coffee imports originate from countries in the region, Vietnam is the top supplier, accounting for around 40% of gross imports of green coffee, Indonesia is second and Colombia, which has also invested heavily in importing its coffee in China, is third Vinacafe has been exporting coffee beans and instant coffee to China, but mainly to the bordering provinces with a low volume 96

2.2.3 Financial Results: 96

It is can be said that since the competition in coffee trading is very harsh, the profitability is very low Small margin sometimes cannot offset with the costs and expenses and extraordinary occurrences, leading the coffee exporters get losses 97 Analyzing the profits and losses of the various group members over the past 6 years gives the following results 97

Figure 3: Financial results 97

97

Source: Vinacafe 97

As can seen above, over these longer periods, the plantations have consistently been the main loss makers, with losses totalling US$ 21 million during the past 4 years of poor prices, and US$ 18 million if the previous two relatively good years are also included This is despite supplying only 15% of the group’s export volumes 97

The exporters have also lost substantially, and the non-core enterprises have also been consistent losers A further minimum US$ 15 million should be written off the group’s accounts receivable, and US$ 6.5 million off the fixed assets 97

The coffee product enterprises, even after taking into account the trading activities of Hanoi Import- Export Company No 1, have been the only category of enterprise to manage to return an overall profit, over both time periods 97

All the non-core businesses other than Dak Uy Irrigation are consistent loss makers The Sugar Company has lost money every year during the past 6 years, a total of VND 29 billions (US$ 1.9 million) and has negative equity of VND 17 billions (US$ 1.1 m) at end 2004 The brick manufacturing company has lost a total of VND 6 billions (US$ 0.3 m) over the last 6 years, and has negative equity of VND 5 billions .98

However the recent informal financial figures for 2008 show that Vinacafe got profit of some VND 250 billions mostly because of the recovery of coffee price As a portfolio of businesses, this performance is not sustainable and radical restructuring is overdue 98

2.3 Strengths and Weknesses: 98

2.3.1.Strengths 98 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 Vinacafe alone trades 30 – 40% of total coffee of Vietnam and the remaining is shared by other 100 companies Other exporters always look at closely the way Vinacafe is trading If Vinacafe buys more today it usually signals for higher price

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 The roasters in U.S.A or European Union usually focus much on stable

quality of raw coffee and regularly secured shipments rather than the price of raw coffee beans because it accounts only 5 – 10% of their production cost and most of the roasters are applying “Just in time” approach to minimize their costs With the advantages of “economies of scale” Vinacafe can expand the market easier than its competitors 98 Vinacafe is not a pure trading company since it also has 25,000 hectares of

plantations It is really an advantage that the other Vietnamese companies do not have 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 It has been proved that the quality of coffee from the concentrated state owned farms is usually better than the smallholder’s plantations This enhances the good reputation of Vinacafe in the international market 99 Good relationship with the customers is another strength of Vinacafe In the market economy, relation means money 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 The philosophy considering customer is not only the client but also “the partner on the same boat” brings in the trust, credibility and good image to Vinacafe Of course, there is no one way relation, Vinacafe also helps the customers when they are in difficult situations by paying in advance, extending the time of delivery 99 Being established on the basis of incorporation between Vietnam Union of Coffee Enterprises and provincial coffee companies, Vinacafe inherits the knowledgeable and experience labor force The employees are competent in growing and processing

of coffee That makes Vinacafe more competitive in producing side by creating high yield, better quality coffee at lower costs 99

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 and it is really an advantage 99 2.3.2 Weaknesses 99 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 (see figure 6) All the powers are concentrated at the BoM and General Director Decision making process is very slowly and cannot catch up with the fast changing and uncertain environment Vinacafe has layer and layer of management to check and verify each decision as it is made and amended The safety net is so big at Vinacafe that it is hard to make a bad decision In fact, it is hard to make any decision at all 99 Taking the current process of business decision making as an example First of all, based on the market information gathered by the people who work directly with customers, suppliers and other organizations, reports are made and submitted to director of trade to evaluate and make business plan All reports pass by trading department with signature of trading director are continuously submitted to finance

sent to the general director According to the general director’s approval and

instruction, trading department prepares the contract and submits to general

director for signature Based on the terms and conditions of the signed contracts, instructions are sent to related dependent or independent accounting subsidiaries, and then the subsidiaries are to fulfill the tasks under the head office’s supervision .100 The current structure emerges some outstanding matters and creates distance

between the top and bottom of the organization It usually takes a long time to get so many signatures of senior managers since they often go on business People are discouraged, cost is higher and business opportunity is over 100 The lack of communication and collaboration between departments and between subsidiaries is also a great problem Information is formally communicated up and down the organizational hierarchy and is not widely shared Works are allocated into narrow Employees generally have little comment on how they do their work So, it does not encourage risk taking and changes and therefore hold the organization’s development back 100 Vinacafe has three core businesses: production, processing and trading However a general meeting held at the end of the year is too little to give good chances for the subsidiaries to discuss related issues The manager of trade should keep in frequent contact with managers of processing and planting and inform them about the price trend, quality requirements from customers and vice versa the processing manager informs about the processing capacity, delivery schedule and so on Vinacafe does not have strict regulations for the communication and coordination so the farms still produce what they can regardless market’s demand We can imagine that all the member companies are potatoes in the bag of Vinacafe, when the bag opens the potatoes run separately 100 The above mentioned problems seem even to be worse since Vinacafe’s subsidiaries usually compete each other in business The duplication and internal competition is not only happening in Vinacafe but also in the other state owned corporations in Vietnam and reducing the effectiveness of the operation All the ten trading

companies of Vinacafe open their procurement branches in the concentrated coffee areas like DakLak, Gialai and Lamdong provinces and representative offices in Ho Chi Minh City for shipment logistic This is overlapping since it is not necessary and economical for all companies to have rep office in Ho Chi Minh City The cost of operating a rep office amounts to billions of VND/ year and if the company exports small quantity the export cost per ton may be two or three times higher than the normal rate The coffee will be more expensive and cannot compete with the others Companies can avoid wasting money by hiring other members to delivery the coffee

on their behalf Vinacafe should have one logistic company to do all these works By doing so, the average export cost per ton is reduced as result of “economies of scale” .101 The internal competition in selling and buying negatively affects to Vinacafe’s image

in the local and international market All the subsidiaries do not have common voice

in trade and it is one of the biggest weaknesses in Vinacafe’s management 101 Manager with poor education and leadership skills is another problem of Vinacafe However it is not easy at all to deal with since they are usually veterans and work for the company for long time, some of them are the founders of the company The current regulations of reward do not motivate the employees to work The increase

without being punished will enjoy one level salary raise regardless his or her

working result The salary of an old driver or security guard is therefore far higher than a young, well educated supervisor Some employees do not pay their attention to salary raise as it is too small and the increase of salary is considered to be a natural process and indispensable Bonuses are usually equal since managers want to avoid any disputes among labors The policy of promotion by seniority also does not

encourage the young, well educated and dynamic employees 101 Consequently Vinacafe has been losing good and talent employees For instant, in Vinacafe Nhatrang, a subsidiary of Vinacafe, all the staffs in the trading department left to work for the other companies because they are not so respected and motivated

to work there Most of them are young, university graduated and aggressive and now they all hold important positions in the companies that compete strongly with

Vinacafe Nhatrang in coffee business As a result, Vinacafe Nhatrang suffers big losses in its business and nearly goes bankrupt The labors turnover is not only happened in Vinacafe Nhatrang but also in the other companies in Vinacafe 102 The poor training program is one of the main reasons for this weakness Due to financial difficulties the budget for training and retraining is limited Beside that some managers do not encourage and create favorable conditions for their staffs to learn more as they are afraid that the staffs will do better than them and take up their current positions 102

In regard to controlling, reporting and monitoring systems are not so strong and effective in Vinacafe This is partly due to organizing structure With vertical

structure and centralized power, top executives have the rights to decide the

organization’s direction and make decisions, however, all necessary information is reported from subordinates and employees Leaders sometimes are not able to monitor all the reports as well as subordinator’s activities 102 Lack of feedback processing system is also one of the controlling weaknesses The standard of performance is not defined clearly and precisely Because the standard is unclear, the organization can not measure and evaluate the actual performance and compare the actual performance with the standard So the deviation, whenever it happens, is too difficult to be recognized The leaders are unable to take any

necessary action to correct and orient the performance 102 The inadequate and ineffective controlling in management is influencing Vinacafe’s operational results Taking the case of Vinacofexim, a subsidiary of Vinacafe, as an example The company has branch in DakLak province The controlling system is too weak that the company does not know exactly what kind of coffee, what quantity, how many tons and at which price the branch buys or sells Vinacofexim receives only the monthly trading report from the branch at the beginning of the next month All the reports show good trading results and Vinacofexim continues borrowing money from the bank to put into the branch for expansion of business and reports to Vinacafe’s head office that the company is making good profit However when the financial statement is audited and an inspection is implemented at this branch, the manager of the company feels shock because huge losses are discovered at the

branch 103 All the companies just focus on feedback control while the concurrent and feed forward control is neglectful This is totally a wrong business management direction .103

period 1999 – 2003 However the subjective reason is weak management in Vinacafe .103 Backward technology and equipments is another weakness of Vinacafe All most of the equipments were purchased longtime ago and need to be replaced or upgraded However since Vinacafe is suffering a big losses it does not have enough money for further investment in processing Consequently, the processing cost is high

meanwhile the quality of the product is low This problem is not easy to solve because hundreds of VND billions are needed to upgrade current processing network It is impossible for Vinacafe to have such a big amount of money at this time 103 CHAPTER 3: ANALYZING OPPORTUNITIES AND THREATS OF 105 THE COFFEE EXPORT OF VINACAFE 105 3.1 Coffee production and export of Vietnam 105 Coffee (coffea) is the major genus of the Rubiaceae family, which includes well over

500 genera and over 6,000 species The genus Coffea itself comprises numerous species Only two of them are currently of real economic importance: 105 Coffea arabica, referred to in the trade as Arabica and accounting for 60%-70% of world production 105 Coffea canephora (or Coffea robusta) called Robusta in the trade and making up 30%-40% of world production 105 Two other species are traded to a very limited extent: Coffea liberica (liberica), and Coffea excelsa (excelsa) 105 The share of Arabica fell from about 80% of world production in the 1960s to

around 60% by the turn of the century, initially because of strong growth of Robusta production in Brazil and parts of Africa but more recently because of the emergence

of Asia as the world’s leading Robusta producing region 105 The original Arabica strains generally produce good liquors with acidity and flavor but they are susceptible to pests and diseases This has led to the development of a number of different varieties that show better tolerance Some quality purists

consider that some of these varieties lack the quality characteristics that created coffee’s popularity – others argue that the bottom line for many producers simply does not permit them to concentrate on just the traditional or original varieties.105 Robusta beans are smaller than Arabica beans Depending on the plant strain, the bean shape is round, oval or elliptical with pointed tips The color of the beans depends on the method of processing – grey when washed and golden brown when prepared by the dry cherry of natural method of preparation The caffeine content

of Robusta beans is nearly twice as high as that of Arabica beans (2%-2.5% versus 1.1%-1.5%) 105 Robusta coffee possesses several useful characteristics such as high tolerance to leaf rust pathogen, white stem borer and nematode invasion, and the potential to give consistent yields For these reasons, the cost of Robusta cultivation is relatively low compared to the Arabica variety On the other hand, inability to endure long drought conditions, late cropping, late stabilization of yields and slightly inferior quality compared to Arabica, are some of the negative attributes of Robusta coffee 106

In general, Robusta is hardier than Arabica and grows well at low altitudes, in open humid conditions, with the cost of production being lower than the Arabica variety

In some countries (Uganda and India, for example) Robusta is also cultivated at fairly high altitudes (above 1,200 m) and under shade These features have helped in the production of dense beans, with better cupping characteristics than those

Vietnam is in the Northern hemisphere tropical belt, stretching from 8o30’ to 23o30’ north latitude The geographical, climate and soil conditions are suitable for the development of coffee and give Vietnam's coffee unique flavor and taste 106 The Haivan pass in 16o14’ at the end of Truong Son mountain range create a 1000m high wall which divide the climatic of Vietnam into two parts The Southern part with hot and humid tropical weather is suitable for Robusta coffee Many big

Robusta coffee areas have been formed, especially in the Western highland In contrast the Northern part of Vietnam with cold winter and dizzying rain is more ideal for Arabica coffee 106 The first coffee trees were introduced in Vietnam in the end of 19th century and have been experiencing many stages with different characters 106 Before 1975: Coffee was grown mainly in the French's farms in the South and state owned farms in the North The trees developed slowly, unstably with low

productivity In many areas, coffee trees were uprooted because of frog and diseases

In 1975, total coffee area was only 13,000 ha with production of 6,000 tons 106

1975 - 1984 period: The area planted to coffee increased slowly, about 1,000 ha per year The coffee yield was low and unstable, just only 0.4 - 0.5 tons per ha 107

1985 - 1994 period: Coffee developed quickly in terms of area, yield and production thanks to the cooperation with former socialist countries The new management mechanism in agricultural sector helped to exploit total strength in the sector In 10 years, the area increased to more than 100,000 ha, yield from 0.4 ton per ha in 1984

to 1.49 tons in 1990 and 1.8 tons in 1994 107

1994 - 2001 period: This was the time that coffee of Vietnam especially Robusta coffee had gained a remarkable development The area increased quickly, coffee concentrated region with high economic value had been established and Vietnam becomes the leading coffee exporter Total coffee area was 565,000 ha in 2001, 4.56 times higher than 1994, an increase of 55% per year Coffee was planted in 24

provinces, mostly in Western highland of about 85% of total area Daklak province alone had 233,000 ha of coffee, accounting for 45% total area and produced 413,000 tons of coffee, accounting for 54% of total production of the country 107 The country's annual coffee export quantity reached 700,000 tons, accounting for 13% of world’s coffee export Vietnam becomes the second biggest coffee exporting country and the biggest Robusta exporter The export turnover was USD 500 - 600 millions In 1995, the average export price reached USD 2,600/ton Coffee become a key industrial crop with high economic value and played an important role in the Western highland in particular and Vietnam in general 107 The average yield attained 2 tons per ha That was the highest in comparison with other leading coffee producer, such as Brazil 0.9 ton/ha, Colombia 0.8 ton/ha,

Indonesia 0.45 ton/ha 107

2001 – 2005 period: This period witnessed a sharp fall of international coffee price The price went down to the lowest level of only USD 350/MT in the history This crisis had a great negative impact to the lives of ten of millions of coffee producers in the world Hundred of thousand hectares of coffee had been chopped down world wide since the farmers could not afford such low price 107

In Vietnam, despite of the Government’s effort to help the farmers to keep the plantation by providing grant and/or preferential loans, tens of thousands of

hectares of coffee had been uprooted Many local traders and coffee exporters come

2005 – Present: After the crisis period, the price had gradually rebound to the level

of USD 1,200 in 2007 It reached its peach of USD 2,200/MT in the beginning of 2008 and went down from this time on For the first time, the coffee export turnover reached USD 1,5 billions, bringing an important foreign currency source for the country and a higher living level for the coffee producers 108 However many of the coffee trees are getting old and need to be replaced The

industry now should focus on renewing the plantations toward a sustainable

development 108 Figure 11: Progress of coffee production and export of Vietnam 108 Source: Vietnam Coffee and Cocoa Association 109

In the trading chain, the farmer sells the harvested fruit cherry, or dried cherry or hulled green beans to a plantation processing centre or to small private traders, who may be agents for one or more processing or export companies These companies conduct primary processing of hulling and / or the secondary processing of grading and export packing For shipment in bulk as opposed to in 60kg jute bags, coffee is transported to Hochiminh City in bags and blown into the containers at the

exporter’s warehouse because the rural roads, bridges and culverts cannot bear the 22mt load of a 20 foot bulk container The same is required for 60kg jute bags ready for export, which weighs 18mt per 22 foot container 109 Since transport and handling of coffee is increasingly moving towards bulk carriage, even in entire shiploads (Brazil) like grain, a long term plan to facilitate road or rail transport will be beneficial to the sector In the meantime, development of bulk truck carriers of 10-12mt capacity, to transport coffee for both bulk and bagged loading into containers at Ho Chi Minh City, can considerably reduce labour and handling costs 109 Although the issue of export licences has gradually been liberalised, only about 5 large international green bean trading companies have become shippers The others who prefer to remain buyers with representative offices in Viet Nam, say it is because becoming a shipper involves setting up a Vietnamese company This requires

manpower and processing facilities for sourcing coffee in the provincial areas, and it

is not worthwhile to enter while existing local (mainly Vinacafe and other SOEs, together with a few private companies) already undertake the procurement process effectively There may also be some resistance to foreign involvement by existing companies via the provincial planning committees A club of main coffee exporters, each shipping more than 4,000mt, was established in March 2003 Currently there are 15 members, which has been set up to discuss market developments, prices, quality and in order to generate cooperation Vicofa plans to establish a coffee

exchange in the Western Highlands to facilitate greater liquidity and price discovery mechanisms for internal trading and hedging from the exporter to the farmer level .109 The Viet Nam State Bank has recently issued official requests to commercial banks

to provide soft loans with about 30 % lower interest rates to coffee growers wishing

to switch to other crops Coffee is one of 18 export products entitled to preferential credit for export under the Export Support Credit Fund of 3,000 billion VND

established for short term export credit facilities at preferential interest rates 110 The SOE farms appear to have adequate processing facilities and drying yards They also have good nurseries for replanting and also for new planting The secondary

most of the coffee from all the member plantations as well as from private farmers through agents as do the other Vinacafe exporters The Vinacafe group’s own

production is only about 14% of the total tonnage exported by the Vinacafe group .110 The major soluble exporting countries are Brazil, Columbia and India, with Brazil exporting 50% of the world’s soluble exports Soluble coffee is largely exported as a bulk product for private labeling rather than as a branded product The bulk

products are used for blending, packaging and branding for individual markets according to market demands 110 Figure 12: Exports of leading soluble coffee producers and Vietnam 110 111 Source: International Coffee Organization 111 There is an excess of soluble coffee production capacity worldwide, making it

difficult for newcomers to compete on cost, quantity or quality in traditional

markets Companies such as Nestle and Kraft are already well established in the newly emerging Eastern European and Russian markets, which are growing rapidly and being largely supplied from Europe 111 Pricing is an important factor, and is dependent on the raw material (Robusta or Arabica), the process (spray or freeze-dried) and on economies of scale Growth in demand for coffee products worldwide is low at 1% to 2% per annum, with growth

in demand for roast and ground slightly higher than that for soluble 111 Worldwide, soluble only tales up 23% of total coffee products, but only 15% in North America and 7% in Germany In contrast, soluble coffee takes 90% of the total coffee consumption in South East Asia 111 3.2 Competition: 111 Approximately 25% of Vietnam’s exports are being sold to international traders who have established buying stations (and in some cases processing facilities) upcountry This would appear to demonstrate: 112 The international traders are dissatisfied with the current service they get from Vietnamese exporters; and 112 The barriers to entry into the coffee exporting business are very low 112 Some of the international traders that have invested in higher technology equipment are able to take advantage of differentiating their products by better and more exact sorting than most Vietnamese exporters can currently provide 112 Table 4: Main international coffee trader 112 112 Source: Vinacafe 112 Currently, as will be seen from the above table, Vietnamese coffee is not being sold directly to roasters in substantial quantities In the export market, Vinacafe has to compete with many companies from different economic sector: state, joint sock, private, join venture, foreign invested companies At present about 150 companies are actively exporting coffee from Vietnam 112 Table 5: The main domestic exporters that compete with Vinacafe 112 113 Source: Vinacafe 113 Vinacafe is currently by far the largest exporter in the market Overall market share for Vinacafe has decreased slightly in 2003 – 2004 The two main domestic

Intimex, whose main line of business is not coffee, has reduced its share of the

market from 20.6% to 5.1% The fact that it was able to command a 20% market share and then reduce to 5% in the last crop year does indicate again how low the barriers to both entry and exit are In order to be able to effectively compete in this market, the participants must have access to cash to finance working capital

requirements Lack of cash has influenced Vinacafe’s decrease in market share during the last crop year 113 The below table shows a comparison between the domestic price at which the

exporters presumably can buy and the FOB price HCMC This represents the

margin available to the exporters It is surprising to see that in 2002 this margin was negative, as during that year most of Vinacafe’s exporters made a profit This points the difficulty of using figures collected externally and the importance of a good internal Vinacafe market information system 113

In Vietnam, it can be said that farm gate prices averaged 96% of the unit value of green coffee exports, and frequently exceeded it The remaining 4% available to the exporters is insufficient to cover the exporters’ processing, transport and other costs

A continuation of this situation represents possibly the greatest threat facing

Vinacafe, and one that would seem to be largely beyond their control 113 Figure 12: Domestic buying price vs FOB price in HCMC and LIFFE price 114 114 Source: MARD & MOIT 114 These high domestic prices are evidence of the severe competition that exists within the domestic coffee markets, from not only the existing traditional exporters but also from international traders and other participants in the domestic market Some of the factors involved in generating this competition include: 114 Low barriers to entry for trading and speculation - the requirements for entry are basically money and storage space The trade and export of coffee is totally liberated for all companies without any intervention and instruction of the government 114 Trading for foreign exchange – SOEs in particular, needing foreign exchange are using coffee trading for this purpose, with losses being covered by profits made on importing goods purchased with foreign exchange; and 114 Increasing export volumes to obtain export subsidies was until this year a factor.114 3.3 Opportunities and Threats: 114 3.3.1 Opportunities: 114 The biggest event for Vietnam’s trade in the recent years was the country officially becomes the 150th 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 115 Another opportunity comes from country’s favorable soil and climatic conditions That helps to make Vietnam’s coffee yield the highest in the world, two tons per hectare as compared with only 0.8 ton per hectare in average Not only that, the natural quality of our coffee is good Coffee of Vietnam is highly appreciated in the market, especially in the US and EU countries High yield and low production costs

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 115 The exchange rate between VND and foreign currencies like USD increases in favor

of export activities The depreciation of VND makes Vietnamese commodity in general and coffee in particular more competitive in the international market

During the period of 10 year, the exchange rate USD/VND has raised more than 50% The government advocates regulating the exchange rate in accordance with the market demand to stimulate the exportation 115 115

In terms of technology, the development of internet and e-commerce has brought in many opportunities for Vinacafe It reduces time and cost for marketing and

communication It is also very convenient for Vinacafe to keep daily contact with customer worldwide The new coffee processing technology: decaffeination that reduces the caffeine content in coffee has created new line of consumers who prefer

to have “mild coffee” That will help to increase the demand for coffee 115 Although Vietnam has a tradition of drinking tea, urban and young people tend to use more coffee in their daily life Drinking coffee is considered to be modern and fashion Many coffee shops emerge and the consumptions in the family also rise That leads to subsequent increase in the domestic demand for coffee The same situation happens in other countries like China, Eastern Europe That leads to an increase in the world's demand for coffee at the rate of 5 – 10% per annum 116 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 1999 – 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 116 3.3.2 Threats: 116 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 116 The recent recovery of price of green coffee beans makes one cup of coffee more expensive in comparison with other drinks The rumor of drinking coffee leads to some diseases like Parkinson and diabetes has negatively affected to the demand

Non tariff barriers, such as hygienic regulations of FDA or Orchratoxin A limit also influence to the export of coffee It is estimated that if the Orchratoxin 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 117 Moreover the practice of intensive farming in coffee plantation in Vietnam causes soil degradation as farmers apply too much chemical fertilizer At the time of high coffee price people rush into growing coffee They come to the forest to cut down trees to make land available for coffee Consequently the area of forest is reduced quickly causing flooding and soil erosion This will certainly affect the coffee yield and quality in the near futures 117 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 117 The last threat relates to labor turnover The number of young, well educated and dynamic employees leaving Vinacafe to work for the foreign companies is on the alarm stage They know very well about the trading strategy, know-how of the company and more dangerously these foreign companies are the main competitors of Vinacafe in the coffee market 117 CHAPTER 4: TOWS AND SELECTION OF STRATEGIES FOR VINACAFE118 44.1 Develop Vision and mission 121 4.1.1 Vision statement: 122 4.1.1 Vision statement 122 44.1.2 Mission statement: 122 44.2 Set up strategic objectives 123 Competitive Force 123 4.3 Select strategies: 125 4.3 Select strategies 125 4.4 Coffee export strategy for Vinacafe 128 4.4.1 Marketing strategy 128 that the two strategies Market Penetration and Restructuring and are proposed:

“Restructuring Vinacafe’s management and inceasing the sales in the existing

market – USA, Europe and Japan” 133 4.3.1.1 Market penetration 133 The 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 133 Vinacafe exports coffee to about 40 countries and territories However, there is now 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 133

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

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 133 Vinacafe should open a representative offices in the key consuming markets like: US, Europe and Japan The representative office would collect information about the market, price, demand…for coffee and handle all marketing activities such as: advetisement, sales promotion and even logistic 133 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 134 The third requirements is to increase the number of sales persons who are

knowlegable about coffee business and can speak English as well as use computers and internet 134 4.3.1.2 Restructuring strategy4.4.2 Restructuring strategy 134 : 134 Summary of Chapter 4 137 5.1 Group of measures on human resources 139 5.2 Group of measures on marketing 141 5.2.1 Improvement of coffee products 141 5.2.2 Establish rep offices in USA and Germany 143 5.2.3 Strengthen market study 143 5.2.4 Build up custom bonded warehouses in the USA and Germany 144 5.2.5 Sales promotion 144 5.3 Group of measure on management 145 5.3.1 Market allocation: 145 5.3.2 Risk management: 145

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: 145 5.1 Establishment of Representatvie offices in the key markets: 145

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 146

Is 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 146 The representative office in Europe should be set up in Germany, the biggest coffee importer market and the gate to Eurpean market 146 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 advsible that Vinacafe should open the rep office in these markets as soon as possible 146

5.4.2 Strengthen financial management 146 5.4.3 Mobilize capital resources 147 Summary of Chapter 5 147 BIBLIOGRAPHIC REFERENCES 151 APPENDIX 5: FARMGATE PRICES RELATIVE TO EXPORT PRICES 164 164 Source: Vinacafe 165

MASTER OF BUSINESS ADMINISTRATION THESIS

60.34.05

SUPERVISOR: ASSOC DR NGÔ KIM THANH

Hà nội, 2009

NEU BUSINESS SCHOOL

*********

DO DUC HUNG

BUILDING UP A COFEE EXPORT

STRATEGY FOR VINACAFE

MASTER OF BUSINESS ADMINISTRATION THESIS

SUPERVISOR: ASSOC PROF DR NGO KIM THANH

Hanoi, 2010

Subject: Building up a coffee export stratecy for Vinacafe 3 CHAPTER 1: INTRODUCTION 3 1.1 Rationale 3 1.2 Problem statements 3 1.3 Research objectives 4 1.4 Research questions 4 1.5 Research methodology 4 1.6 The scope, expected results and limitation of the thesis 4 1.7 Structure of thesis 5 APPENDICES ……….…97 96 27 ACKNOWLEDGEMENT 28 ABBREVIATIONS 29 LIST OF TABLES 30 LIST OF FIGURES 31 ABBRIVIATION 32 ACKNOWLEDGEMENT 34 EXECUTIVE SUMMARY 2 CHAPTER 1: INTRODUCTION 9 1.1 Rationale 9 1.2 Problem statements 9

- Vinacafe does not diversify its products for export Its main export items are

mainstream green coffee beans with lower value 10

- Vinacafe does not use its resources effectively to compete successfully in the

international coffee market 10 1.3 Research objectives: 10 1.4 Research questions: 10 1.5 Research methodology 11 1.6 The scope, expected results and limitation of the thesis: 11

7 Structure of thesis:1.7 Structure of thesis 12 14 2.1 Strategic management: 14 2.1.1 Definition: 14 14 2.1.2 Stages of strategic management: 14 21.1.3 Process of formulating business strategy 15

Bargaining power of Suppliers 19

Bargaining power of Customers 19

2.2 International trade management: 32 2.2.1 The role of international trade: 32 2.2.2 International trade strategy: 32 Summary of Chapter 2 35 1.2 SWOT analysis: 35 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 35 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: 36

- Internal factor: The strengths and weaknesses internal to the organization 36

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

environment 36

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 36 Criteria examples 36 Advantages of proposition? 36 Capabilities? 36 Competitive advantages? 36 USP's (unique selling points)? 36 Resources, Assets, People? 36 Experience, knowledge, data? 36 Financial reserves, likely returns? 36 Marketing - reach, distribution, awareness? 36 Innovative aspects? 37 Location and geographical? 37 Price, value, quality? 37 Accreditations, qualifications, certifications? 37 Processes, systems, IT, communications? 37 Cultural, attitudinal, behavioral? 37 Management cover, succession? 37 Philosophy and values? 37 Strengths 36 Weaknesses 36 Criteria examples 36 Disadvantages of proposition? 36 Gaps in capabilities? 36 Lack of competitive strength? 36 Reputation, presence and reach? 36 Financials? 36 Own known vulnerabilities? 36 Timescales, deadlines and pressures? 36

Cash flow, start-up cash-drain? 37 Continuity, supply chain robustness? 37 Effects on core activities, distraction? 37 Reliability of data, plan predictability? 37 Morale, commitment, leadership? 37 Accreditations, etc? 37 Processes and systems, etc? 37 Management cover, succession? 37 Criteria examples 38 Market developments? 38 Competitors' vulnerabilities? 38 Industry or lifestyle trends? 38 Technology development and innovation? 38 Global influences? 38 New markets, vertical, horizontal? 38 Niche target markets? 38 Geographical, export, import? 38 New USP's? 38 Tactics: eg, surprise, major contracts? 38 Business and product development? 38 Information and research? 38 Partnerships, agencies, distribution? 38 Volumes, production, economies? 38 Seasonal, weather, fashion influences? 38 Opportunities 38 Threats 38 Criteria examples 38 Political effects? 38 Legislative effects? 38 Environmental effects? 38

IT developments? 38 Competitor intentions - various? 38 Market demand? 38 New technologies, services, ideas? 38 Vital contracts and partners? 38 Sustaining internal capabilities? 38 Obstacles faced? 38 Insurmountable weaknesses? 38 Loss of key staff? 38 Sustainable financial backing? 38 Economy - home, abroad? 38 Seasonality, weather effects? 38 Figure 3: Diagram of SWOT business 38 Source: SWOT analysis template 38 Then, for each trend of development, management needs to identify the associated opportunities and threats 39 The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives 39

- Strength attributes of the organization that are helpful to achieving the objectives .39

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

objectives 39 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 39 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 39 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 39 1.3 Porter’s five force models 39 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 39 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 40 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 40 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 40 Figure 4: Porter’s five force model 40

Bargaining power of Suppliers 40Bargaining power of Customers 40

Source: Competitive Strategy 41 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 41 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 41 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 41 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 41 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 42 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 42 1.4 Porter’s generic models: 43 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 43 Figure 5: Porter’s generic model 43 Target Scope 43 Advantage 43 Low Cost 43 Product Uniqueness 43 Broad (Industry Wide) 43 Cost Leadership Strategy 43 Differentiation Strategy 43 Narrow (Market Segment) 43 Focus Strategy (low cost) 43 Focus Strategy (differentiation) 43 Source: Competitive Strategy 43 Michael 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 43

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 44 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 44 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 44 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 44 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 44

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 45 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 45 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 45 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 .45 CHAPTER 2: ANALYZING STRENGTHS AND WEAKNESSES OF 46 THE COFFEE EXPORT OF VINACAFE 46 32.1 Overview of Organization structure and main activities of Vinacafe 46 32.1.1 Head oOffice: 48 2.1.2 Exporting Companies 48 3.1.2 Exporting companies 49 Every farm under of Vinacafe has its own processing facilities 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 350,000 MT

of coffee beans a year 49 Most of the processing equipments are local made However 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 49 Every year Vinacafe export more than 200,000 MT of green beans to many countries

in the world Beside its own produced beans, Vinacafe purchase coffee from other producers in the region The export performance of Vinacafe will be analyzed more detail in the following part 49 2.1.3 Plantation Enterprises 50 3.1.3 Plantation enterprises 50 Every year about 35,000 MT of coffee beans are produced by these farms 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 the 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 50

At December 2007, Vinacafe controlled some 29,000 ha: 50

· Coffee 19,639 ha – produced 32,580 tonnes of coffee 50

· Rice 4,322 ha – produced 25,190 tonnes of rice 50

· Sugar 2,800 ha 50

· Rubber 800 ha 50

· Cassava 472 ha 50

· Cashew nuts 323 ha 50

On this State land, ‘employees’ grow products in return for a pre-agreed quantity of coffee or other products, and the farmers are free to sell the excess In reality

therefore, it is not the SOEs that are farming these plantations, but the individual employees, who are paying a form of ‘lease payment’ denominated in coffee or other products This payment is related to the depreciation borne by the SOEs on the assets (principally coffee trees) that are being used by the farmers, plus, in some cases inputs such as the employees’ salary, fertilisers, insecticides, irrigation and a management fee This has the effect of leveraging Vinacafe’s results, in that in a year

of low prices, this is exacerbated by low ‘rents’ received, and vice versa The

combination of low coffee prices combined with the current contracting system has

resulted in the plantations generating the main portion of the losses within the group over the past four years 51 During 2007, the Vinacafe plantations produced 32,580 tonnes of coffee from its own plantations, but the exporting enterprises exported a total of more than 220,000 tonnes, so the plantations are producing less than 15% of the coffee that is exported

by the group 51 2.1.4 Coffee Product Companies 51 3.1.4 Coffee products companies 51 32.1.5 Other nNon-core eEnterprises and aActivities: 52 3.2 External analysis 52 3.2.1 Macro-environment analysis: 52 3.2.2 Micro-environment analysis 59 3.3 Internal analysis: 67 3.3.1 Production: 67 3.3.2 Processing 68 3.3.3 Marketing 69 3.3.4 Coffee export performance 73 3.3.5 Human resources 81 3.3.6 Financial resources 82 3.4 SWOT table 83 3.4.1.Strengths 83 3.4.2 Weaknesses 84 3.4.3 Opportunities 84 3.4.4 Threats 85 Summary of Chapter 3 85 2.2 Vinacafe's coffee export performance 86 2.2.1 Main coffee export item: 86 Coffee beans: 86 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 86 Figures 7: Categories of exported coffee from producing countries 86 86 Source: Coffee exporter’s guide 2002 86 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 86 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 86 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 87