Analysis of Starbucks Strategy - Assignment Example

CASE STUDY OF STARBUCKS Table of Contents Table of Contents 2 Introduction 3 Company background 3 Question Business Model and Business Strategy ofStarbucks 3 Perceptual mapping: Starbucks 3 Generic Strategy: Starbucks 4 Question 2 Competence and Critical Success Factors 5 Strategic planning process 5 Value Chain 5 Porter’s Five Forces 6 Core competencies and critical success factors 8 Question 3: Overall Assessment of Starbucks 8 Analysis of Starbucks strategy 8 Conclusion 8 Appendix: 12 Introduction The corporate sector is undergoing rapid changes in the contemporary scenario driven by the growth of technological resources and mostly importantly thriving competition. According to Lavie, Haunschild and Khanna (2012), the approach of business firms have changed from profit earning into developing a sustainable business practice. Now organisations are not only targeting to be the market leader but also to keep hold of that position in the face of high-end competition. Doyle and Stern (2006) stated that most of the changes in the business management and strategic planning processes are result of frequent external changes in the environment and the influence of external environment on the business houses have increased over time. Carrying on these statements, this report focuses specifically on the strategy building process of American Beverage Company, Starbucks in respect of their current position in the concerned industry and the future implications of their strategic approach. Company background Beginning from a single store in Pike Place Market (Seattle) and moving on to become one of the top brands of the world, Starbucks has faced all the challenges and overcame them efficiently (Grant, 2012). The basic idea for expansion and growth of the company was brought in by CEO Howard Schultz when he materialised that coffee was more about experience rather than taste. This concept framed the core strength of Starbucks and introduced the service structure of the company (Grant, 2012). The aim for global expansion of the company was mainly related to brand development and customer brand awareness. In context of financial support for pursuing the strategic activities of the company, Starbucks utilised their stock offerings and converted themselves into an international beverage house. However, the firm faced a gradual downfall after the retirement of Schultz from the post of CEO as the profits and market value of Starbucks started to fall (Grant, 2012). Schultz rejoined as the CEO in 2008 and helped in bringing back the profit margins to a positive curve. Nevertheless, the competition in the beverage industry is raging and amidst this competition upholding the brand name and organisational growth in a sustainable manner is still a challenge for Starbucks (Grant, 2012). Question 1: Business Model and Business Strategy of Starbucks Perceptual mapping: Starbucks The entire beverage industry can be segmented into two primary groups namely, ready to eat and make-yourself. Big brands such as Nestle, Starbucks are however operating in both forms of market (Marcer, 2012). Nestle and Starbucks together are also the largest shareholder of the beverage industry of the United Kingdom (Jeannet and Hennessey, 2010). On the other hand, the number of competitors has increased in the market in the form of internal market influencers such as Costa Coffee, Barista, Timothy’s etc and indirect market influencers which includes substitute categories of products such as tea, soft drinks and also make-yourself coffee such as Nestle, Georgia, etc (Barney, 2009). Apart from these, Starbucks is also facing competition in terms of service structure from other global brands such as McDonalds (Parker, 2011). The perceptual mapping process will help in identifying the current position of Starbucks amidst this competition filled market. The perceptual map has been developed by focusing on the aspects of price and product and service range of the firms. Figure 1: Perceptual Mapping of Starbucks (Source: Afuah, 2007, p.43) From the above given perceptual map, it can be observed that all the selected companies have been measured in terms of their product range and price. The inclusion of Nestle and McDonalds has been conducted for enhancing the scope of the map. Nestle is currently leading the global market of packaged beverages and food items whereas McDonalds is known for their service quality. Both these firms challenge the service and product development aspects of Starbucks. In terms of product range, Starbucks, Nestle and McDonalds are leading the race; however Starbucks is ahead in the price range. This shows their strategy of serving quality in exchange of value (Ander and Kapoor, 2010). Also this strategy can backfire considering that Nestle, Costa Coffee and McDonalds have a higher product range and diversification. On the other hand, companies such as Timothy’s can attract the middle income range consumers with their low price strategy (Dentchev, 2009). However, Starbucks has now directed their focus on diversification of products and services in order to maintain their existing consumer base and also draw the attention of new and potential customers. They have included a new segment named Lunch time menu with varieties of Panini, salads (Starbucks, 2014). These items can also be served to stop and grab customers and is expected to increase the service base of Starbucks. Generic Strategy: Starbucks Porter’s generic strategy was developed mainly to help organisations identify their direction for gaining a competitive advantage in the industry. The generic strategy mainly focuses on the strategic approach of a company for developing its competitive advantage. Figure 2: Porter’s Generic Strategy (Source: Cool and Schendel, 2010, p.221) Considering the above strategy and the given case of Starbucks, the strategy Starbucks can be identified as of a focused differentiation. The financial comparison of Starbucks from 2005-2011 reflects an increase in the restructuring expenses of the company in the year 2009 which was again reduced in 2010 (Appendix 1). This marks the changes made by Schultz after returning to the company. Another instance was the consistent increase in both operating expense and operating income (Glowik and Smyczek, 2011). According to the observation of Godfrey and Hill (2009), the changes made in Starbucks have solely focused on regaining their financial strength by improving their services. They have ignored the competition and concentrated on their core strengths. In the words of Hall (2011), Starbucks have reflected a strong focus on managing their operational expenses to gain cost competitive advantage for improving their financial performance and then started to diversify themselves for business expansion and growth. Question 2 Competence and Critical Success Factors Strategic planning process The internal and external activities of Starbucks will help in reflecting the strategic planning process with the help of value chain analysis and Porter’s Five Forces in the following section: Figure 3: Porter’s Generic Strategy Value Chain (Source: Ireland and Sexton, 2010, p.56) Starbucks has expanded their market to over 65 countries and also are mainly operating with the help of direct stores which has helped the company to reflect their brand to a larger consumer group. On the other hand, as direct handling is more, customers can experience Starbucks service processes and the company gets a ready feedback and marketing information collection process. The direct stores of the company contribute around 80% of the overall sales of the firm (Lee, 2009). The operational process of Starbucks thus facilitates the concept of self engagement in order to enhance their service quality. The supplier base of the company is mainly distributed between Latin America, Africa and Asia. By reducing the logistics functions of the business and accelerating the procurement process, Starbucks has enhanced their operational efficacy (Haberberg and Rieple, 2008). Similarly, the outbound process of the company has also been managed in a decentralised process so that the final products can reach the target markets in short time. The marketing and sales processes of Starbucks are the most extensive and focused function (Makadok, 2011). Starbucks has involved itself in both online and offline marketing processes. They try to promote their products and services as well as the brand name. It can be stated that the marketing process of Starbucks is mainly need based as they focus on the organisational capability and requirements for meeting the company objectives (Robinson and Pearce, 2010). Service is the strongest factor and the core competency of Starbucks, as stated above Starbucks believes that coffee is more about experience rather than a beverage. This concept has helped them design their service structure in accordance with the consumer expectations. The supporting activities of Starbucks are mainly formed on the basis of their core values. Relating the business objectives with the core values of the company has helped in increasing the business firm. The organisational structure has been designed in a customised manner where the top management of Starbucks have a hierarchical structure whereas the middle and lower level employees have a matrix structure (Shrader, Taylor and Dalton, 2009). This human resource management follows a target oriented approach and also focuses on creating a shared vision among the employees and the management of the organisation (Verwaal, Commandeur and Verbeke, 2010). The use of technology for Starbucks mainly relates with their production, marketing procurement and service improvement processes. Technological concepts such as cloud computing, evolving speciality coffee segment, performance monitoring tool and online marketing equipments are few that are commonly used in the functional processes of Starbucks. Porter’s Five Forces Figure 4: Porter’s Five Forces (Source: Porter, 2010, p.16) Threat of New Entrants (Moderate): As the number of retailers and service providers has increased in the coffee industry, the treat of new entrants has also increased in the beverage industry. However, as the competition is high, the number of retailers having a similar profile such as the big brands is discouraged to enter the market. According to Cooksey and Gates (2008), changes in the lifestyle of the people and their taste and preferences have been a big contributor in reducing the threat of new entrants in the market. Threat of Substitute Products (High): The threat of substitute in the beverage industry is the highest because of the variety of drinks available in the market. Beginning from tea to soft drinks, the diversity of the products and services available in the beverage industry has increased over the years consistently (Davis and Olson, 2009). Another major factor is the low brand switching cost of the consumers that can easily motivate the customers to shift their taste. In this regard, Starbucks has specialised in premium coffee segment where the products and services are measured in terms of quality and the stakes of brand changes of consumers reduces (Härtel et al. 2010). Bargaining Power of Customers (Moderate): The coffee industry generally creates a high bargaining power for the customers. However, the aspects of brand loyalty and preferred taste do influence the decisions of the consumers in regard to brand switching (Miller and Cardinal, 2007). Considering the nature of the market Starbucks operates in, the bargaining power of buyers is limited as the aspect of price reduction and bargaining has been nullified by their brand equity. On the other hand, the development of the local market stores also offers an alternative solution to the customers (Hope Hailey, Farndale and Truss, 2005). Thus, it can be stated that the bargaining power of the customers are moderate. Bargaining Power of Suppliers (Moderate): Considering the procurement process and raw materials of Starbucks, they outsource special brand of coffee selected from specific regions and thus reduce the cost of supplier switching cost (Bae and Lawler, 2008). On the other hand, the brand name and capital size of Starbucks allows it to take advantage of its suppliers but considering the Fair Trade certification of Starbucks their relationship with suppliers are strictly focused on quality and service (Geppart and Williams, 2006). Competitive Rivalry (High): The coffee industry is mainly segmented between the ready to drink and make yourself service providers (Jeannet and Hennessey, 2010). Considering this segmentation, Starbucks operates in the ready to drink coffee industry where the market competition is extremely high. Although Starbucks is one of the leading market share holders of the industry, the competitors such as Nestle and Barista also have a significant amount of market share (Makadok, 2011). Also, the intense competition among the firms has reduced the market growth rate as the coffee industry has been estimated to enter the maturity stage (Grant, 2012). However, the competitive advantage of big firms such as Starbucks and Barista has helped them in staying out of the competition and curve their own market. Core competencies and critical success factors The key strength of Starbucks is their product and service differentiation strategy. The firm has successfully created their competitive advantage with the help of accurate innovation and customer need identification in their service structure. The inclusion of snacks in their service structure has allowed them to serve a wider group of consumers. Apart from these, the marketing activities of the company has been spot on with their organisational objectives and service structure allowing the consumers to understand the aim of the firm and the nature of the services being provided at Starbucks (Jeannet and Hennessey, 2010). Another crucial core competency of Starbucks is their employee management process (Bae and Lawler, 2008). The company has focused on integrating its functional departments so that employees are able to communicate and understand their role in the big picture. Effective horizontal integration is one of the primary strengths of Starbucks which has supported in the development of their excellent service structure and organisational strategy (Parker, 2011). Question 3: Overall Assessment of Starbucks Analysis of Starbucks strategy Beginning from the point when Howard Schultz took over as the CEO of Starbucks in the year 2008, Starbucks has only experienced success till date. However, the period between 2000 and 2008 had not been great for the concerned firm (Grant, 2012). They lost their market share and revenues in bulks. The changes made by Schultz does not only reflects his leadership skills but also signifies the ability of the workforce to adapt to situations and changes taking place in the internal and external environment of the company. As observed by Parker (2011), flexibility is the key to success in the contemporary scenario of business. On the other hand, application of horizontal integration in the work structure has not only helped in managing their employees but also reduced their cost of operations. This also enabled Starbucks to increase their profit margin and also gain a cost competitive advantage. Carrying forward this point, the competitive advantage of Starbucks is mainly based on their ability to diversify their products and service frequently and also match them with the consumers’ changing taste and preferences (Grant, 2012). These factors have helped Starbucks succeed in the competition filled market. Conclusion Business strategy of Starbucks is mainly based on their ability to diversify their products and service base. Although the competition in the beverage industry is increasing and the number of substitute products are growing, Starbucks have created a special comfort zone for themselves by serving premium level coffee with their customised Starbucks Experience. The management process of the business is focused on value creation in the internal functions of the company so that they can be ahead of the competition. On the other hand, the reducing gap between Starbucks and its competitors in terms of market share can be cause of concern for the company in the coming days. Reference List Afuah, A., 2007. Business models: A strategic management approach. 4th ed. New York: McGraw-Hill Ander, R. and Kapoor, R., 2010. 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B., Taylor, L. and Dalton, D. R., 2009. Strategic planning and organizational performance: A critical appraisal. Journal of Management, 10, pp. 149-171. Starbucks, 2014. Lunch. [Online]. Available at: [Accessed 11 March 2015]. Verwaal, E., Commandeur, H. and Verbeke, W., 2010. Value Creation and Value Claiming in Strategic Outsourcing Decisions: A Resource Contingency Perspective. Journal of Management, 35, pp. 420-444 Appendix: 1: Financial Performance 2011-2005 of Starbucks Read More