Starbucks Business Strategy - Case Study Example

STARBUCKS BUSINESS STRATEGY By Location Starbucks Business Strategy Introduction The Starbucks Company has gained recognition in the recent past for its outstanding brand characteristics. The company has managed to secure a strong market position and established a competitive advantage over other companies in the industry. The company has made a commitment to providing its customers with a memorable experience, as well as quality coffee brewed from the highest quality coffee beans. Over the years, the company has established unique strategies that have helped it to maintain its market position. Over time, Starbucks products have proved to be a premium. Starbucks Company ventured in the United Kingdom in 1998. The Starbucks Company then managed to establish over 65 coffee stores. In order to understand the factors that have propelled the company to success, it is critical to analyse the company’s business model and strategies. This paper will carry out a critical analysis of the company’s strategies and business model and evaluate their efficiency. Starbucks Business Model and Business Strategies Porter’s Generic Strategies Applied by Starbucks The Starbucks Company adopted cost leadership in an effort to gain a competitive advantage by ensuring that it registers very low cost of production. As highlighted in the case study, the Starbucks Company experienced a decline of its profits in 2007. The Starbucks Company had registered 20 years of flourishing the business until 2006 when the share price of the company began to decline. The return of Howard Schultz in 2008 saw him venture in cost leadership in an effort to get the company on the right track. After reviewing the operating practices, Howard Schultz recognized that the operating costs were higher than 125 million US dollars. A close analysis reveals that 70% of the operational expenses were related to Starbucks outsourcing for distribution in its efforts to increase stores rapidly. The company resulted in closing down some stores and renegotiating the outsourcing agreements in an effort to lower the costs. In addition, Starbucks opened a manufacturing plant in South Carolina, a move that sought to reduce the transportation costs (An Analysis of Starbucks as a Company and an International Business 2011, n.p). The new manufacturing plant in South Carolina would support stores in the South East region. The cost reduction efforts led to the company saving about 500 million US dollars in two years. Evidently, the cost leadership approach used by Starbucks was highly effective. However, the most outstanding generic strategy used by Starbucks is differentiation. The company has ventured into extensive differentiation. Starbucks provides customers with a diverse range of products. According to the case study, the company had introduced about 75% beverages and 19% foods, a factor that indicates the company’s progress in diversifying products (Grant 2014, p. 455). In an effort to launch new products that conform to the needs of the customers, the company indulges in extensive research and development. Extensive research enables Starbucks to understand the emerging customer needs and perceptions before launching any products (Behind coffee store sales growth in Malaysia’ 2013, n.p). More specifically, Starbucks has focused on understanding the needs of its target markets depending on demographic segmentation, geographic segmentation and psychographic segmentation. Notably, men and women aged between 25 and 44 years define the greatest target market of the Starbucks Company and contributing to a remarkable 49% of the total sales. Starbucks has recognized that this is an incredible target market whose main purpose is to find a third place in their lives by visiting the Starbucks stores (Beverages: Starbucks in literacy drive with Tell Me a Story plan 2010, n.p). The company has realized that presenting this group of customers with a diverse range of products that suits their needs through differentiation can translate to increased sales. Starbucks also relies on young adults aged between 18 and 24 years who are responsible for 40% of the company’s sales (Blumenstyk 2014, p. 40). Evaluation of Starbucks Differentiation Strategy Starbucks also relies on teenagers and children explaining why the company has undertaken product innovation targeting this group of customers. The introduction of steamed milk or babyccinos is an evident case of differentiation in an effort to provide the target group with products that add value to them. Worth noting is the fact that Starbucks has stayed in touch with the needs of its different markets. Differentiation will be impossible without a proper understanding of the customer needs. Therefore, Starbucks embarked on an extensive research and identified the different target groups and their psychographic segmentation (Browder, S, & Thornton 2008, p. 66). Therefore, the company has relied on product innovation in order to present each target group with a greater variety of products that suit the group’s lifestyle. Without doubt, the differentiation strategy has contributed to the company’s success. The coffee industry relies on innovation of products as one of the unique driving forces. Therefore, the Starbucks Company has exhibited its awareness of the major driving force in the industry and developed a unique differentiation strategy. The company has competitors who are actively involved in innovation, and who are launching new products into the market. Therefore, the chief executive officer of the company has sought to ensure that Starbuck introduces products of superior quality that present customers with more value than the substitute products from competitors (Bussing-Burks 2009, p. 83). The company launches new products on an annual basis with the purpose of providing customers with new and exciting products. The company has remained a leader I the industry because it undertakes proper market analysis before embarking on its differentiation strategy. On the other hand, the company has developed a unique service innovation under its differentiation strategy. The company seeks to provide customers with an outstanding Starbucks experience defined by an amazing atmosphere and outstanding customer service. Therefore, the company has undertaken rigorous research and introduced training programs in an effort to ensure that employees can deliver quality services. In addition, Starbucks has ventured into innovative activities that contribute to the maintenance of its stores. Service innovation is a venture that complements product innovation under the company’s differentiation strategy (Chua & Banerjee 2013, p. 237). Over the years, the company has focused on human resource development and has earned itself a remarkable reputation for outstanding customer service in all the Starbuck stores. In the coffee industry, product innovation does not suffice because customers consider both products and services. Therefore, Starbucks has been able to understand the business, embark on both products, and service innovation (Company Spotlight: Starbucks Corporation 2006, p. 20). The company’s differentiation strategy has compelled it to form partnerships and collaborations with the main objective of extending product innovation. As highlighted in the case study, the company initiated collaborations with companies such as Pepsi (Grant 2014, p. 453). Extensive research reveals that in recent years, the company has also established collaborations with Noble, Craft, Barnes, and Nordstrom. Other partnerships that Starbucks has developed include ties with Danone, Green Mountain, and Whole Foods (Donovan 2014, p. 740). Notably, the company has successfully made remarkable acquisitions that have led to the diversification of its products. Its collaboration with Apple and the launch of relaxing music within Starbuck stores and Concord Music Group represents some of the service innovations that have established Starbucks as a recognizable brand in the market. Without doubt, the company has embarked on an extensive differentiation strategy in accordance with the views of Porter that the differentiation should bring in a diverse range of products (Fontevecchia 2011, p. 19). Starbucks has moved a step further to venture into service innovation as a measure of achieving differentiation. The company’s differentiation strategy has helped it to stay ahead of most of the competitors. Therefore, Starbucks success has resulted from a broad differentiation strategy. Its differentiation efforts concentrate on a broader segment of the total market (Zmuda 2010, p. 3). The company is keen to meet the expectations of the customers by combining quality products with quality service and an outstanding atmosphere. Therefore, the company has proved to be an expert in providing value of the customers through quality products and setting remarkable prizes for the quality products. Without doubt, the company has an assurance of potential continued growth because of its large market (Food & Drink: Starbucks in overhaul to boost global brand growth 2011, n.p). Evaluation of Starbucks Focused Differentiation A close analysis of Starbucks strategies reveals that the company also relies on focused differentiation. The company has identified its leading target markets and designed valuable products for the reach of its markets. The company responds to the needs of each target market by launching a new product for them each holiday season. In addition, the company has introduced a reward scheme for its frequent and regular customers (Greg Farrell in New 2010, p. 21). The reward scheme provides an opportunity for the customers to make a purchase and earn points. The customers can benefit from the points by accessing free merchandise. Without doubt, the steps taken to narrow down the broad differentiation strategy and concentrate on identifying market segments have presented positive outcomes for the company (Joseph 2013, p. 14). Although the main generic strategy remains to be broad differentiation, the company exhibits certain efforts geared towards focused differentiation. Starbucks Position in the Bowman’s Clock The Bowman’s strategy clock represents a company’s competitive position in comparison with the strategies used by competitors. The Starbucks Company occupies the fifth position in the strategy clock, which is focused differentiation. As highlighted above, focused differentiation seeks to present customers of a narrow market with appealing products that have unique features and that add value to the customers. Evidently, the Starbucks Company has focused on offering its regular customers a diverse range of products and valuable reward schemes (Lee 2013, p. 487). The company is willing to access the highest quality coffee, rely on master roasters, in an effort to produce unique coffee flavours and combine with incredible customer service adding value to the customers. The company’s efforts to meet the needs of the identified target market have been evident in its determination to give quality a priority (Marketing Week: FOOD AND DRINK: Frappuccino launch helps Starbucks extend reach 2011, n.p). Through extensive research, Starbucks understands the need of its target market and can tailor new products to meet such needs. The figure below illustrates the Starbucks position in the strategy clock. Core Competencies and Critical Success Factors of Starbucks PEST Analysis of Starbucks Political Factors The Starbucks Company has taken considerations of the political factors that are likely to affect its rapid expansion strategy. Notably, the company identified China and India as some of its leading targets for international expansion in 2012. However, the company had to comply with the numerous government regulations that govern the Asian market. Starbucks has succeeded in its compliance and conformity to the industry-specific rules and practices that prevail in the Asian market. Therefore, the company has registered growth in India and China, which remain to be potential markets for the future. In 2011, Starbucks had only 58 stores in China (Perry 2008, p. 26). However, in 2015, the company expected to hit the 1500 mark of new stores in the Asia region. More specifically, Starbucks expects to have 1500 coffee houses in China alone. In India, Starbucks opened its first store in 2012 and were likely to register growth in the future. Therefore, there is evidence that Starbucks has considered all the political factors that affect its operations international markets (Rentas-Giusti 2003, p. 440. The stability of different countries determines whether the management team can select a country as a potential target for expansion. Economic Factors Over the years, the Starbucks Company has exhibited its expertise in defining product prices that conform to the income of the potential customers. Although its coffee houses are located in metropolitan cities, Starbucks has often adjusted its prices in order to accommodate more customers. As the case study highlights, the chief executive officer resulted in relatively lower prices for some products in 2009 when the company was striving to get back on the right track (Grant 2014, p. 449). Economic factors have been a critical consideration the in the company’s expansion strategy (Sanchanta 2010, p. 58). The company identifies countries that have a potential for growth after analysing the economic growth of each country. For example, the focus on Asian countries has been a move defined by the remarkable economic growth registered in the region lately. Social Factors The company has also exhibited its consideration and understanding of the social factors as critical drivers of business in the coffee industry. The company has undertaken intensive research that has helped it to understand changing consumer preferences, lifestyles, as well as work patterns. Such information helps the company launch products that conform to emerging consumer preferences and lifestyles (Senatore, Yang, & Wing 2011, p. 40). In response to emerging consumer preferences and lifestyles, the company has ventured into psychographic segmentation, which has had a positive impact on the company’s focus differentiation strategy. Technological Factors As highlighted above, the company has embarked on increased product and service innovation relying on emerging technologies. Technology has provided advanced brewing and roasting equipment that have helped Starbucks to deliver unique flavours to the customers. Technology in agriculture has had both positive and negative effects (Starbucks Corporation 2014, p. 17). On the positive note, technology ensures that farmers can produce higher yields of quality coffee beans. In addition, hybrid coffee beans have emerged because of agricultural advancements. However, Starbucks has had to respond to the increasing criticism surrounding the genetically modified products (Starbucks Corporation 2014, p. 8). Critical Success Factors Starbucks Core Competencies The Starbucks Company has outstanding core competencies. It has developed the expertise of carefully selecting the highest quality coffee beans and establishing remarkable supply chains. In addition, the company’s commitment to innovation and differentiation has proven to be a competency for the company. The Starbucks Company has established positive relationship with different stakeholders specifically with its partners who are the employees, the suppliers, as well as the customers. The company has exhibited its commitment to corporate social responsibility by promoting environment friendly coffee farming. Starbucks Competitive Advantage Notably, the Starbucks Company has relied on both cost advantage and differentiation as the leading strategies that give it competitive advantage. The company has outstanding resources and capabilities and allocates resources effectively. the Starbucks brand has a global reputation and the company is recognized for its expertise in selecting quality coffee beans. Starbucks also has an excellent networking in its value chain, which involves the suppliers, licenced stores, and customers. Starbucks prides itself with exemplary customer service and other capabilities that make it outstanding from competitors. As highlighted in the case study, the company has embarked on competitive research and development, which enables it to identify emerging customer needs and innovate new products that meet the customer’s needs (Grant 2014, p. 451). The company’s executive team has exhibited its expertise in developing appropriate business techniques and identifying the best sites for Starbucks coffee houses. In its local and international expansion strategy, Starbucks has succeeded in identifying the best locations for its stores (Starbucks Details’ 2014, n.p). Although critics have highlighted that cannibalization of Starbucks stores occurs, there is a lack of evidence suggesting the effect of cannibalization. In the United States alone, Starbucks had 10,789 stores in 2011. Researchers have highlighted that the United States market contributes to the company’s increasing profits immensely. In addition, the company relies on highly motivated employees regarded as partners in the business. Through extensive human resource development strategies, the company has ensured that these partners deliver high-quality customer service, which is an outstanding core competency of the company (Starbucks Expands Card, Rewards Programs Across Brands 2013, p. 76). The store atmosphere and ambience are also a rare resource for the company, which serves to make the experience at Starbucks memorable for many customers. The company has also embarked on developing multiple distribution channels and powerful relationships with stakeholders, factors that have had positive impacts on the company’s business. The company’s corporate social responsibility strategies have also served to enhance the brand reputation, a factor that makes Starbucks reputation a rare resource that the competitors cannot easily achieve (Starbucks Plans India Expansion 2012, p. 78). Overall Assessments of Starbucks Strategy Worth noting is the fact that the company’s strategies have propelled it to recognizable success. The company differentiation strategy serves as one of the outstanding strategies that have helped the company meet the customer needs by introducing a diverse range of products. For many customers, Starbucks has proven to be a premium brand that presents them with remarkable experience defined by quality products and outstanding customer service. The increasing profit margins registered by the company indicate that its strategies are successful in the market. Through its rapid international expansion strategy, the company has ventured into more than 80 countries (Starbucks Unveils Accelerated Global Growth Plans 2012, n.p). As highlighted in the case study, the expansion strategy has registered increased profitability and increased brand presence in different regions (Grant 2014, p. 459). The company has also embarked on focused differentiation in its efforts to narrow down to a smaller market segment. These strategies have proven to be very successful. However, there is an evident fear that the company has exhibited overreliance in the American market (Sway 2007, p. 1). In different markets, competitors are also relying on innovation and challenging the position of Starbucks. Online marketing can be an alternative strategy for the company that will increase brand awareness and presence. It will also introduce a new platform for the company to have a direct relationship with customers. The company has established an outstanding global reputation, which can help it dominate its online spaces (Uggla & Filipsson 2009, p. 28). With the remarkable number of customers, Starbucks is assured of increased attention in its virtual space. Venturing into online marketing can help the company maximize the customer experience (Zegler 2010, p. 63). Conclusion Evidently, the Starbucks Company has established unique business model and strategies that have led to its remarkable success in the industry. The company’s management team, as well as research and development team, have worked on identifying potential markets that can serve as targets for the rapid international expansion. In addition, Starbucks has relied on differentiation and focused differentiation in an effort to gain competitive advantages over other players in the industry. The company has established a global reputation associated with premium products, quality customer service, and a remarkable atmosphere. In the future, the company should maximize its use of online marketing as an alternative strategy of increasing its profits. Bibliography An Analysis of Starbucks as a Company and an International Business 2011, OAIster, EBSCOhost, viewed 14 March 2015. 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