Selecting Restaurant and Quick Service Food Restaurants - Case Study Example

OPERATIONS MANAGEMENT: WHY STARBUCK FAILED IN AUSTRALIA by Student’s name Code+ course name Professor’s name University name City, State Date Introduction Successful organisations are fuelled by efficient operations management. All organisations whether large or small, are involved in operations, and it depends on how well the managers carry out this function. Operations management is defined by Jones and Robinson (2012, p. 5) as “the planning and organising of production of manufactured goods and delivery of services.” Essentially it is the whole process of converting inputs into outputs. The concept has evolved over a long period of time only gaining recognition in recent years. With globalisation and increased competition in the market, firms have to develop sustainable operational strategies which are aligned to the corporate strategy or risk being put out of business or be forced to close some branches as was experienced by Starbucks in Australia (Patterson et al. 2010). Researchers (Jones & Robinson 2012) enumerate various differences in operations of manufacturing and service firms but also recognise the fact that these differences are becoming more blurred with time. It is argued that service firms possess features such as intangibility, heterogeneity, perishability and simultaneity but if looked at closely the only difference is that simultaneity where services are produced the same time and place as they are consumed hence rendering the interaction between consumer and provider very vital. This report is concerned with operations management in service firms and more so it will concentrate on finding out why Starbucks failed in Australia bearing in mind its successes in other countries such as America, Japan and China. In doing so, it will evaluate its approach to winning customers and competing effectively, its operations, and how it manages its facilities. A management perspective will then be given outlining the reasons why it failed and what can be done to avert such a situation in the future at Starbucks and the hospitality industry as a whole. Customers and Competitors The main business of the hospitality industry is offering services to customers, and as such, the customers are key to business success. The front-line staffs are also very essential as they are the first contact between the customer and the firm. If they offer poor quality products or services, the customers are less likely to repeat their purchases. In essence, they portray the company image which has a great impact on company sales and revenues. Firms must therefore, develop strategies to ensure they gain customer loyalty so as to retain existing customers and acquire new ones. This according to Jones and Robinson (2012) can only be achieved by having appropriate order qualifiers and order winners. This concept was developed by Terry Hill of the London school of business in 2000. Terry Hill regards order qualifiers as the ‘must haves’ or the basic requirements for a company to be viable in the marketplace while order winners are what differentiates a firm from its competitors or essentially its competitive advantages; it is what makes customers purchase products from that particular firm and not the others despite price or cost differences (2012, p. 34). The market qualifiers for the hospitality industry are mostly quality and high-priced. For a firm to exist in this industry, it has to offer high quality products at the existing price. For example, in the Australian market, companies like McDonald, Starbucks, Gloria Jeans and McCafe must offer consistent quality coffee for them to survive especially due to its discerning and sophisticated palates (Patterson et al. 2010). To make profit, Patterson and his colleagues argue that the firms must be able to turn over 15kgs of coffee per week or above the national average which is 11kgs (2010, p. 43). They also need to hire baristas who are very expensive or risk losing business. Starbucks with its expansion strategies ignored the role of Baristas by hiring inexperienced baristas leading to poor quality coffee and failure in the end. It was forced to close 61 stores due to reduced sales and increased losses. Order winners are very essential, in any firm, and research by Horte & Hakan (1997) indicates that, most of these order winners end up becoming order qualifiers in the long-run. A firm must be able to differentiate itself from the competition if it has to retain customers and get new ones. The existing customers become a source of new customers for the firm through the word-of-mouth. Order winners include cost, speed, flexibility, reliability, quality, image, product design and after-sale services (Jones & Robinson 2012). A firm may pursue one or a combination of these goals depending on its marketing mix and customer segment. Starbucks in Australia was determined to offer high quality coffee and also an experience or ‘third place’ in people’s lives. In fact, the founding CEO Howard Schultz once said, “we are not in the coffee business serving people; we are in people business serving coffee.” (Patterson et al. 2010, p. 41 quoted in Schultz & Yang 1997). As such, the company ensured its customers enjoyed the experience of drinking coffee in comfortable chairs and environment full of ambience while emphasizing on customer service. The front-line staff had to make sure they knew customer by name and engage fully with them. This worked for Starbucks revolutionalised coffee drinking in Australia giving justification for payment of premium. However, it lost its commitment to these order winners while other companies like McCafe imitated them thus losing their business (p. 44). It no longer offered unique experience to the customers that could ensure sustainable competitive advantage. Moreover, Australian customers already had an established coffee culture not forgetting they are discerning palates. Starbucks also operated in a perfectly competitive market structure where there are no barriers to entry or exit and existence of many firms. This type of market structure requires companies to keep innovating as competitors are bound to copy each others strategies. Developing an order winner which is very difficult to imitate is the key to attaining sustainable competitive advantage in this market. Though Starbuck offered a servicescape, engaging customer service and brand image as a point of differentiation, it was not enough especially due to the premium price charged (Patterson et al. 2010, p. 44). The upcoming individual boutique cafes were able to imitate these characteristics thus making the premium price unjustifiable. The company was also known for offering only coffee thus making it difficult to engage in supplementary services. Horte and Hakan (1997) acknowledge that the opinion of managers regarding their order winnings or strengths must be shared by the customers if success is to be achieved. In this case, the customers of Starbucks did not share the same opinion regarding the service experience and quality of coffee thus did not see justification for a premium price. Furthermore, coffee boutiques were offering stronger coffee and were more relationship oriented than Starbucks. Coffee in Australia is “more about relationships as it is about products” (Patterson et al. 2010, p. 43) and Starbucks lost focus of this important driver of success. Another way to compete effectively is to determine your market segments and offer products according to each segments needs (Jones & Robinson, 2012, p. 49). However, Starbucks in Australia, as opposed to other countries like Japan was offering standardised coffee to all customers. They were offering coffee in American style at all stores, and this did not please Australian customers who already had an established coffee culture and value for relationships. The idea of offering coffee in different quantities or containers was not essential for these customers; all they yearned for was local texture or strong coffee hence their inclination to boutiques offering local feel. Market research is thus important to determine what customers in various segments need and then develop strategies to fulfil these needs rather than offering a product in mass market. Research by Morritt and Weinstein (2012, p. 5) indicates that the hospitality industry segmentation is based on “measurability, substantiality, accessibility, and defensibility.” Companies like McDonalds not only offer products on mass markets but also according to customer segments hence success. For example, they have a health-conscious customer segment for those who prefer healthier options (p. 9). Starbucks relied on less affluent customers. This made it vulnerable to environmental changes such as economic downturns. Operations Operation management is a systematic process which determines success or failure of an organisation. Historically, production management involved mass production of goods and services but today, many choices do exist. Proper planning has to be done in order to get the right outputs out of inputs, and in some cases the outputs of the firm become its input. First, the firm has to organise itself as this determines how functions are carried out. Jones and Robinson (2012) indicate that a firm can be simple, functional, divisional, conglomerate, hybrid, networked or virtual depending on the degree of hierarchy, centralisation, formalisation and complexity. Operations management is thus part of a system in the organisation and works with other departments like finance and marketing to achieve good results. The 4Vs of operations helps the manager to determine if the organisation is functioning properly. These include volume, variety, variation and variability. Volume refers to size of output; variety to the product or service range; variation to level of demand changes over time while variability is the extent of customisation (Jones & Robinson 2012, p. 14). At Starbucks, the volume is high, but variety is low as the company only offers one product, which is coffee in American style. Starbuck also offers frappucino whose demand is seasonal thus subject to changes. It also operates on low variability as its procedures are standardised to produce only one product. Jones and Robinson (2012) note that firms need to make process choices in order to succeed as different processes yield different results. The process should be able to convert inputs into outputs using minimal resources and effectively as wastage could lead to losses. What go into this process are the materials, customers and information which should be managed effectively for better results. Hospitality industries deals with customers hence are involved in controlling customer service processes. These processes determine which competitive priority the company is to take such as product customisation, fast delivery, development speed, consistent quality, high performance design and low-cost operations (Wild 2006). To support these priorities, process choice is crucial. This can be project process, batch flow, job shop, line flow or continuous flow. Starbucks utilises the line flow process to produce high volumes of coffee which is standardised. It has little variability in the services offered hence can produce coffee and wait for customers. According to Patterson et al. (2010) Starbucks automated its production process to produce more coffee and ensure speedy delivery of service. However, this was unacceptable to customers who were used to traditional or manual way of making coffee giving them the pleasure of enjoying the aroma of coffee beans and watching how coffee is made. This led to loss of sales as customers quit. Furthermore, it meant a variety of products could not be produced to supplement the coffee like in other companies like McCafe and McDonalds which offered lattes. Different products have different life-cycles from establishment, growth, maturity and decline. Each stage has different characteristics, which call for different marketing strategies. Starbucks entered a mature industry where a coffee culture had already been established. The Australians enjoy drinking coffee, and for them it is not a luxury but a necessity (Patterson et al. 2010). Bearing this in mind, Starbucks need to have studied this culture and adapt its coffee to local culture. Furthermore, in maturity stage a lot of advertising and promotion is needed to acquire new customers. At this stage also, product differentiation is crucial to set itself apart from competition not forgetting competitive pricing and intense distribution (Jones & Robinson 2012). Starbucks was not involved in advertising and promotion but relied on its global image to attract customers. It also depended on its unique servicescape to get customers to spread word-of-mouth to other potential customers. This led to its downfall as at this stage of coffee lifecycle, more advertising and promotion was needed to create awareness and to inform customers why a premium price was worthwhile. Other companies like Gloria Jeans, coffee club and Hudson were involved in intense advertising thereby winning new customers and a higher market share. Gloria had 500 stores, McCafe 488 stores; Coffee club 220 and Hudson 45 compared to Starbucks 23 stores after closure. This could be attributed to its processes, which failed to recognise the need for promotion and advertising. Operations also involve ownership and management of operations. Depending on environmental factors such as economic, sociocultural factors, regulatory/ legal, and technological factors and also the service firm lifecycle firms decide on how to operate (Jones & Robinson 2012). They can either choose to diversify products, offer new products, or enter new markets. A firm in its growth stage such as Starbucks can opt to enter foreign markets as part of global domination strategy. However, considering the external and internal environment is vital for success. Conducting market research on new markets provides data needed to make decisions. In Australia, for example, with a collective culture relationships are important and a firm wishing to venture in this market needs to understand this. Starbucks decided to venture in Australian market and force its product on customers instead of studying the market first. McDonald, on the other hand, entered the market one store after another hence was able to gain trust and commitment from customers thus loyalty. Starbucks did not understand that Australians were not interested in foreign brands and culture. Companies that franchised their operations letting the locals take control such as Gloria Jeans were very effective as they gave a local feel. Facilities To be successful in any industry especially in hospitality, the selection of location and sites is very important. It is also essential to determine the facility capacity to avoid overproduction or underutilisation leading to resource wastage (Jones & Robinson 2012). Firms need to be productive hence efficient utilisation of resources to yield high output. Melaniphy (2007) identifies various factors to consider when selecting a site for a restaurant. One key factor is knowledge of the business; know the characteristics of best performing units in terms of labour costs, profit, and gross margins. Starbucks should have known that gaining profit in Australian market is not easy due to the high cost of balistas and price fluctuations of coffee prices. Knowing your customers is also vital for success for market segmentation and targeting. Starbucks did not know its customers well as it should have known that they like the local taste of coffee rather than global brand (Patterson et al. 2010). Understanding attitudes, trends and habits of customers is also vital. Accessibility is crucial and as such the organisation should be located in an area where entry and exist is easy. Evaluation of competitive facilities is also vital. Starbucks underestimated its competitors when selecting its location leading to failure. Instead of saturating the market with its stores, venturing in areas with less competition like it did in Japan and China would have worked. Another attribute of Starbucks facilities is that they are large in size to accommodate its servicescape strategy. The area used by customers to rest while enjoying their coffee is huge in comparison to other establishments like McDonald. This leads to a lot of lost revenue and reduced sales and profits. This space could be put into other productive uses. Companies with less space could offer supplemental services and incur fewer costs than Starbucks thus making more revenue and competing effectively. Servicescape has become a very important factor to consider in facility management (Jones & Robinson 2012). It entails the physical environment in which a service process takes place. The environment according to Jones and Robinson offers differentiation in customer experience hence is a competitive advantage for a company in the hospitality industry. It involves putting up comfortable chairs, right temperature, lighting, landscape, layout, decor and ambience. Starbucks had a unique servicescape offering ambience and comfort to customers, but it was not worth it since Australian customers are more interested in strong coffee and relationships which Starbucks could not offer. Furthermore, other companies imitated the servicescape idea making their establishments more attractive. Management perspectives In view of the above analysis, we can deduce that Starbucks was doomed to fail right from the start with its ineffective market entry strategy or business model. It is important to consider cultural factors before entering foreign markets. Australians have an established coffee culture which is hard to do away with thus a company wishing to venture this market need to adopt its products to local needs. Starbucks established many stores in Australia without evaluating its success but relying on its success in other countries. Companies that adopted franchising as opposed to opening own stores were thus more successful as they were operated locally. In other terms, companies should think global but act local in order to succeed in foreign markets. Another failure of Starbucks was due to its value proposition. A company’s value proposition determines customer loyalty and consequently customer retention and attraction. Companies should know how their target markets define value, how competition value proposition stands in marketplace, vulnerability to competitors and nature of loyalty and customer base (Jones & Robinson 2012). In this case, Starbucks did not know value attached to its coffee by customers or the value proposition for competitors so as to outdo them and gain advantage. Though it offered service experience, its quality was low and customer engagement low leading to failure. Failure also resulted from not carefully determining order qualifiers and order winners. Its order winners (servicescape, brand image) did not last for long as they were easily imitated. Furthermore, it entered the market when the product was at maturity and failed to engage in strategies that can win customers such as advertising and promotion (Jones & Robinson 2012). Other companies like McDonalds had a very effective communication strategy leading to increased sales. In a nutshell, ineffective business model, communication failure, poor management of facilities and lack of sustainable value proposition led to the downfall of Starbucks. References Horte, S A & Hakan, Y, 1997. The firm and its customers’ views on order-winning criteria. International Journal of Operations and Production Management, 17 (10), pp.1006-1019. Jones, P & Robinson, P, 2012. Operations management, Oxford University Press, UK. Melaniphy, JC. 2007. The Restaurant location guidebook: a comprehensive guide to selecting restaurant and quick service food restaurants, International Real Estate Location Institute, USA. Morritt, RM & Weinstein, A. 2012. Segmentation strategies for hospitality managers: target marketing for competitive advantage, The Haworth Press, New York. Patterson, PG. Scott, J & Uncles, MD. 2010. How the local competition defeated a global brand: the case of Starbucks. Australasian Marketing Journal, 18, pp. 41-47. Wild, R. 2006. Essentials of operations management. 5th ed. Cengage, Mason, OH. Read More