Coffee House Chain: Starbucks Corporation - Essay Example

Coffee House Chain: Starbucks Corporation In today’s intensely competitive world, organisations are increasingly pressured to achieve targets and goals with limited and scarce economic resources. Effective deployment of organisational strategy directs the scare resources and efforts towards a charted course, eliminating waste arising from lack of direction (Andrews 1986). Objective of formulating corporate level strategies is to allow a company to identify competitive advantages and sustaining those competitive advantages in order to survive, forge ahead and stay ahead of the competition. Company’s core values, principles and key objectives (Kaplan & Norton 1990) should drive the business strategy formation and for this purpose, it is important to have a clear understanding of “What” the company’s business mission is; “Who” are the customers; “What” do the customers consider as value; “What” have been the organisation’s results so far in catering to these needs and “What” are the future plan in meeting the consumer needs (Abell 1980). In order to achieve a competitive advantage, the firm should deploy its resource base including competencies, cultures and attitudes to add value and exploit environmental opportunities while countering threats (Barney, 1995). The report analyse the strategic approach taken by the Seattle based speciality coffee house chain, Stars Buck Coffee in its global business and how successful these strategies have been in supporting and sustaining the company’s competitive edge within a dynamic business environment. 1. Company Overview Founded in year 1971 in Seattle as a single coffee house, Starbucks Corporation today is one of the most successful companies and the largest coffee house company in the world. With 8,179 self-operated and 10,009 licensed stores located across 45 countries, there are a total of 18,188 Starbucks cafes globally. 10,295 outlets from above are located in USA (Starbucks Fact Sheet 2007). With an annual turnover of US$ 7,786.9million for fiscal year 2007, Starbucks ranks 338 in the Fortune 500 companies (Fortune 500 List, 2007). Its rapid expansion from a single outlet selling roasted coffee beans in whole and grounded form to an internationally renowned chain of coffee houses serving a wide variety of coffee beverages, snacks and the overall Starbucks experience warrants an analysis of its business level strategies which have contributed to the success of the company. 2. Internal and External Environment Analysis The internal analysis to assess Starbucks’ strategic capabilities and core competencies have been carried out through a VRIE and a Value Chain Analysis included in Appendix IV and VI. Starbucks key resources and capabilities identified under the VRIE framework indicate the high value addition brought in to the product, service and process by the company’s strong financial resources which had allowed the company to expand without burden of capital costs, increasing profitability. Another key resource is the high capacity roasting plants which allows the company to enjoy volume benefits. Its R&D unit which develops versatile coffee beverage and different coffee extract products supports the company’s generic strategy of offering highly differentiated product line. Considering the resource base of highly trained Baristas that includes “Black Apron” Baristas who has not only been educated on serving and customer care but on coffee planting, roasting and grinding process, the company holds a distinct advantage over its competitors which is rare. The same can be said on the overall product expertise which the company’s management, especially the senior management displays through hands on involvement in the process. The difficult to imitate Starbucks brand image which has actually been built on strong word of mouth communications of its key deliverables such as quality and high level of customization is another key resource of the company. The company’s culture built on high level of employee moral is another key resource of the company which gives it a strategic advantage over its competition, i.e. reducing the average turnover levels of Baristas in Starbucks to be 25-30% less than that of the industry standards. The internal analysis also identifies the organization’s ability of exploiting some of the key resources and capabilities through its internal structure and large network of outlets. The wide business domain which the company has defined for itself has allowed it to exploit its R&D capabilities of developing new coffee based products as well as capitalize from senior management capabilities surrounding strategic alliance formations. Assessment of the company value chain also indicate the high level of investments which the company has incurred in building above mentioned internal resources and capabilities such as R&D and special regional management teams. The external environment assessed through a PESTE analysis (Appendix V) indicates that the company’s business environment is offering medium level of opportunities through globalization, social trends and demographic changes. Technological developments as Internet have widened the business opportunities for Starbucks. 3. Business Level Strategies at Starbucks At the heart of successful business strategies lies the responsiveness to the changing business environment, with a set of internal core competencies (Hamel 1996) and therefore this analysis will assess the identified business strategies in terms of its compatibility with business environment and how well opportunities are exploited through company capabilities while countering threats or acquiring deficient internal capabilities (Andrew 1986). Refer to Appendix I for a summary of business strategy categories. 3.1 Starbucks Competitive Strategy A company’s operation process consist of inputs, throughput and output and in each of these three stages, a company can establish its competitive advantage. If a company were to establish its competitive advantage through its resource base, capital, assets, know-how and competencies all come in to focus (Dewit & Mayer). IBM or 3M can be seen as good examples of companies that base their competitiveness on resource base where their talented knowledge worker base and the vast number of patent holdings generated through committed R&D work. A company can also use Activity System to establish its competitive advantage and an excellent example is Dell computers where its ultra efficient JIT sourcing and delivery has allowed it to establish best costs and superior consumer response. Assessing the Starbucks strategies, it is evident that the company is perusing a product differentiation as its generic competitive advantage strategy. The differentiation is achieved through highly customized range of served drinks and highly differentiated line of coffee beans combined with the augmented products as special ambiance, skilled service of Baristas and other elements of Starbucks experience (Thomston & Strickland 2003 case). Appendix II illustrates the Starbucks Experience depicted in a three tire product offering model (Armstrong & Kotler 2000). Refer to Appendix III for a breakdown of Starbucks product line portfolio. The company has successfully generated a competitive advantage which is difficult to be imitated in terms of its highly trained baristas as well as high level of customization offered in the served coffee beverage category (Barney 1996). Howard Shultz the actual founder of Starbucks coffee house concept had effectively added value through its core competencies and capabilities of coffee roasting and expertise which the initial Starbucks had as a high quality coffee bean retailer. This strategic move indicate how organisation configuration and business model was revamped to include the coffee house concept so that the “valuable” resources were fully exploited, giving Starbucks a distinct competitive advantage. Appendix VI (Barney 1991). Analysing their differentiation strategy, it is evident that the company is catering to different segments of coffee drinkers by tapping on to individuals, corporate clients and food service customers as hotel chains. The Starbucks product differentiation lies in three main elements of quality, distribution and image with a high element of “perceived value along with the value actually delivered” (Thomson & Strickland, 2003 Page. 166). to the customer which has aided it to command its premium prices. The vast effort is being put in to cleating a unique Starbucks experience and making it the “third place” in a person’s life after home and office. The distribution of the product is also highly differentiated where the cafes are placed in close proximity to blanket cover the geographic areas. The Starbucks rational is that a “person wants his or her coffee immediately and don’t want to travel too far in search of it” (Starbucks 2007). The manner in which it is being delivered also makes a point of differentiation and allowing customer to customize his or her coffee drink makes Starbucks a unique offer. 3.2 Proactive Strategies to Out-compete Rivals: Analysing some of the strategic moves which Starbucks has taken in out competing its rivals, the most prominent are the take over of rivals as Seattle’s Best Coffee and Torrefazione Italia in 2003, Dietrich Coffee and Coffee People in 2006. Such take over have allowed the company to accelerate its expansions while reaping the benefits of scales resulting in better cost structures. 3.3 Strategic Moves Responding to Business Environment In establishing its product differentiation, Starbucks has responded well to the changing environmental factors (Refer to appendix III for environmental analysis) such as health consciousness promoting less caffeine consumption and use of non fat milks and creams by accommodating these needs in their product lines. Even environmental concerns and social consciousness of its customers have been encompassed in to their product differentiation in offering the “Black Apron” line of exclusive coffee which honours the dedicated organic coffee growers. By launching its Fair Trade Certified coffee with added costs for certification process, the company had also contributed to the upliftment of social conditions of the growers. Products such as Ethos bottle water and Horizon Organic milk are other examples of how Starbucks has responded to changing business environment. These moves indicate that Starbucks has redefined its business domain to be wide enough to avoid the sort of “Marketing Myopia” which many firms fall pray to by defining their business too narrowly, for instance as “ coffee bean business” . (Levitte 1960). Creating Wifi hotspots with high-speed free wireless internet connectivity in Starbucks cafes illustrates how the company has responded to changing consumer social habits as well as technological environment. Offering of Starbucks reloads which can be funded through internet payments and also used at its online stores are another indication of how changing environmental conditions have been exploited to advantage. 3.4 Strategic Alliances and Partnerships Strategic partnerships aiming to strengthen areas where internal capabilities and resources are weak (Barney 1991) mentioned in Appendix IV under the VRIE assessment are an important part of business strategy. Starbucks alliances with PepsiCo to create and market cold coffee drinks in bottles and cans such as “Frappuccino” using Pepsi distribution channels has been greatly successful. This partnership is now geared to serve not only the North American market but other geographic regions in the world as well. It has also entered in to strategic partnership with Craft in strengthening its mass retailing distribution of Starbucks coffee beans. Partnerships with ice-cream manufacturer Dreyers Grand Ice-cream is another example of how strategic business alliances can build business. 3.5 Key Functional Level Strategies HRM Starbucks success is largely attributed to its enthusiastic and highly trained workforce. Company strategy has always been to reward excellence of employees and Starbucks is today among the best companies to work for as per Fortune 500 ratings and Financial Times ratings. With attractive fringe benefits, stock option plans and high wages and salary scales, the Strabucks refers to its employees as partners, promoting commitment and loyalty and this is one of the key resources of the company which is hard to imitate due to “social complexity” involved ( Barney 1991). Logistics Starbucks success can also be largely attributed to the excellent track record in site selection and setting up of outlets through its corporate team which specializes opening new outlets. The strategy to use in-house design and fabrication teams has allowed Starbucks to cut costs in outlet openings and also maintain the unique Starbucks ambiance in line with company expectations. This capability is of high value and allows the company to exploit the real estate opportunities which the company has benefited from by opening outlets in correct locations. Finance Strategy As coffee is traded as a commodity and can be subjected to price turbulences, the company has entered in to fixed price agreements with farmers to ensure price stability and also acquired coffee futures so that customers are not subjected to price movements regularly. Starbucks has practiced premium pricing strategy commanding almost 5 times that of normal competitors as Mc Coffee for a cup of coffee based on their quality, image and ambiance. However, as it enters less affluent markets with low disposable incomes, Starbucks need to keep its cost structure low to offer promotional pricing and have flexibility in manipulating prices to suit the customer spending powers. A Strategic Cost Analysis drawn from a Value Chain Analysis will allow the company to have a clear understanding of where the costs lie in the input and throughput stages of the company operation (Thomson & Strickland 2003). Refer to Appendix VI 3.6 Business Expansions Starbucks has expanded its business to over 45 countries and entry to China in 1999 was one of the most promising but high risk moves for the company where more than 540 outlets are currently in operation. Being a predominantly tea drinking country, Starbucks has managed to lure the chines tea drinkers to Starbucks mainly attracted by its lifestyle image (Fawler 2003). The company has taken strategic moves in establishing itself in China by opening Starbucks Business Ltd to manage the Chinese market as well as committing itself to social upliftment in this market. “Starbucks donated 500 million US dollars to start its "Starbucks Chinese educational program" to help improve the Chinese educational situation, especially the Middle West poor areas” (Fowler 2002) 4. Strategic Gaps and Issues Based on internal and external analysis and existing company strategies, following strategic gaps and issues can be identified: Lack of own distribution channels to facilitate the wide product reach which the company plans through supplying some of its products to mass retail sector. High price parity between competitors and the company product. The premium pricing which will limit entering many developing country markets based on consumer disposable incomes which may hold high volumes if correct price is offered. Saturating markets in USA 5. Alternative Strategies & Recommendations Having analysed the Starbucks business strategies, it is clear that the company is leveraging on its expertise in coffee by moving in to diversified businesses linked with coffee through own operations as well as through strategic alliances. The lack of own distribution operation to cater to the mass retailing sector is an internal deficiency which Starbucks has currently countered through strategic alliances. However, in the long run, the company may need to look in to establishing own distribution operations for keeping its cost base low and to keep a better control of the business. A second strategic issue that can be identified is the high pricing strategy which had been successful in US and European markets but not be effective for low income markets which the company will now have to enter in to having saturated their traditional markets. For example, coffee drinkers are paying close to 22 renminbi (US$ 2.65) for a medium latte in China which is perceived as exorbitant (Fowler 2003) When the company choose to move in to less affluent geographic locations, the need for offering a different strategy may come in to play. For example, such markets may have to be targeted with lowered prices where the company offer its core benefits at a value for money price. To do this, the company may have to set up some roasting operations in locations such as India which can cater to the whole Asian region. As India is a coffee growing country, Starbucks can invest in not only roasting plant but also in growing where by the quality and variety can be as per Starbucks specifications. Such backward integration may offer new areas of business for the company which can exploit the company’s internal capabilities and capacities built over years relating to expertise in coffee. Thirdly, the industry analysis (Porter 1996) - Appendix VII, indicate that the company is operating within a moderately attractive industry and in the long run the saturation may occur, limiting business expansions. Thus the answer to this is to consider diversifications in to other areas of business which may not be directly related to core business but can utilize and exploit existing business capabilities and resources such as the brand image and financial strength. An example is how Starbucks has successfully entered the entertainment industry through acquisition of Hear Music. Company can consider investing in hotel and restaurant business etc for future diversifications. What is needed is that the company anticipate future needs of the market and invest in building the required resources and capabilities today (Abell 1999). 6. References Abell, D. F. Defining the Business: The Starting Point of Strategic Planning. Englewood Cliff, New Jersey: Prentice Hall...1980. p.169. Abell, D. F. “Competing Today While Preparing for Tomorrow.” Sloan Management Review 40, no. 3 (Spring 1999), pp. 73–81. Andrews, K. R. Concept of Corporate Strategy. 3rd ed. Richard D Irwin. 1986 Armstrong, G. & Kotler, P. Marketing: An Introduction. 5th ed. Singapore: Person Education Inc.2000. Barney, J. B. (1995) “Looking Inside for Competitive Advantage” Academy of Management Executives. Nov page 49 Brown, S. L. & Eisenhardt, K. M. Competing on the Edge. Boston: Harvard Business School Press. 1998. Duncan, J. W., Ginter, P. & Swayne, L.E. Competitive Advantage and Internal Organizational Assessment. Academy of Management Executives, Vol.12, No 3. 1998, pp. 6 –16. Fowler, G. A. (2003) “Converting the Masses: Starbucks in China” Far Eastern Economic Review. July 17 Hamel, G. Strategy as Revolution. Harvard Business Review, Vol. 74, No. 4, July – August. 1996. pp 80 – 81. Hamel, G. & Pralahad, C.K. Competing for the Future. Boston: Harvard Business School Press. 1994. Hamel, G. “Strategy as Revolution.” Harvard Business Review 74, no. 4 (July–August 1996), pp. 69–82. Kaplan, R.S. & Norton, D.P. Strategy – Focused Organizations. Boston: Harvard Business School Press. 2001. pp 1-27. Kiechel, W. Corporate Strategies Under Fire. Fortune Magazine. December. 1982 p. 38. Kaplan, R.S. & Norton, D. P. 1996, The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, Boston. “Our annual ranking of America's largest corporations: Fortune 500 List of Companies” (2007) CNN Money.com. Retrieved on 08.10.2007 from http://money.cnn.com/magazines/fortune/fortune500/2007/snapshots/1267.html Porter, Michael E. “What Is Strategy?” Harvard Business Review 74, no. 6 (November– December 1996), pp. 61–78. Porter, M. Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: Free Press. 1980. Thomson, A. A. Jr. & Strikland, A. J. Strategic Management Concepts and Cases. 13th ed. New York: McGraw-Hill Publishing Company Ltd. 2003 Starbucks Fact Sheet (2007) Starbucks.com retrieved on 07.10.2007 from http://www.Starbucks.com/ Appendix I Figure 1 –Business Level Strategies at Starbucks Coffee Appendix II Figure 2 – Three Tire Product Make up of Starbucks Source : Armstrong, G. & Kotler, P., Marketing: An Introduction, 5th ed, Singapore: Person Education Inc, 2000. Appendix III Figure 3 - Starbucks Product Line Mix Source: Starbucks Product Line, Starbucks.com Appendix IV Table 1 – VRIE Analysis – Starbucks Coffee Appendix V Table 2 - Environmental Analysis for Starbucks – PESTLE Political factors As most of the coffee is being grown in south American countries as Brazil. Political relations between US and these coffee growing countries is of great importance. Sound political relations may pave way to economic integrations and preferential trade agreements beneficial for companies as Starbucks. Starbucks global expansions will benefit from smooth political relations and lack of tensions in new markets which they aim to enter. Environmental factors The company needs to take in to account the environmental damages in wide scale coffee planting. In selecting sites, aspects such as restrictions of new buildings within preserved building zones such as in the case of many European countries may have implications. A good example is Starbucks having to close down its outlet at the Imperial palace in China. Social factors Changing life styles; increased number of single person homes, yuppie culture placing greater importance upon trendy life style experiences as promoted by “third place” by Starbucks may all impact the market positively. Aging population with lesser number of young, working persons in the population may reduce the market. Technological factors With the increased usage of internet, opportunities to reach customers with products and information has increased. Consumer viewerships, listnerships etc have changed dramatically, challenging the traditional advertising and promotional modes as radio. For example, advertising free music channels are now being offered by satellite radios as XM. Internet connectivity has become wireless and in WiFy hotspots, people relax and surf the net for pleasure or for work. Economic factors With the economic growth decelerating in Europe and US, the propensity to spend may reduce slightly. The price pressures will mount as the currencies of coffee growing countries strengthen over the years against the dollar. Starbucks effort to increase the Fair Traded Coffee quantities within its purchase volumes will further pressure the cost structure. Appendix VI Figure 4 - Company Value Chain Analysis for Starbucks Coffee Appendix VII Porters Five Force Industry Analysis – Coffee Cafes and In Packed form Porter, M. Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: Free Press. 1980. Bargaining Power of Customers –Starbucks caters to many segments of customers including those who come in for prepared drinks and snacks at the cafes, those who purchase the coffee beans at the outlets or in supermarkets; customers who purchase products such as Frupperchino (and iced coffee drink) which is available through mass retailing channels and the business clients as corporate offices, restaurants and hotels etc. Starbucks also cater to number of its strategic alliance partners by supplying coffee extracts for manufacturing their own products as ice-cream. The bargaining power of most of these customer groups are moderate as customers are fragmented. Bargaining Power of Suppliers – When industries are supplied by few suppliers with specialized requirements or with scare resources, then the bargaining power of the suppliers is high. This can lead to increased costs of supplied materials, price increases, supply quotas etc. In the case of coffee industry the suppliers have low bargaining power as coffee is traded mainly as a commodity in the world markets. Threat of new entrants – The entry barriers can be in the form of legislature requiring licensing or in the form of natural monopolies or oligopolies. The entry to industries can be also in the form of heavy capital intensity naturally restricting new entrants. The threat of new entrants in to the coffee industry is moderate as potential of new entrants of small scale opening up in regional and local scale is high. The entry barriers to enter the global market in the scale which Starbucks has done is high due to the capital intensity of outlet setting up and roasting facilities. Rivalry among competitors – Rivalry among the competitors is high as the products being offered are similar and differentiation is being achieved mainly through the speciality service ambiance, level of customisation than the product itself. The roasted coffee bean segment is also highly competitive. Threat of Substitutes – Is high as people are increasingly substituting coffee with tea and bottled water or other fruit juices, with the increased awareness of unhealthy effects of caffeine. Fresh fruit juice parlours with sandwich stands are offering alternative breakfasts to Starbucks. As per the above Porters Industry analysis, the coffee industry which Starbucks operate is of medium attractiveness as the Bargaining power of customers and the threat of new entrants is moderate while the supplier power is low. The threat of substitutes and the rivalry among existing competitors is high in the industry. Analysis of Starbucks Business Level Strategies Submitted By: Module Title: Date : TABLE OF CONTENT CONTENT PAGE Executive Summary i 1. Company Overview 1 2. Internal / External Analysis 1 3. Business Level Strategies at Starbucks 3 3.1 Starbucks Competitive Strategy 3 3.2 Proactive Strategies to Out Compete Rivals 5 3.3 Strategic Moves Responding to Business Environment 5 3.4 Strategic Alliances and Partnerships 6 3.5 Key Functional Level Strategies 7 3.6 Business Expansions 8 4. Strategic Gaps and Issues 9 5. Alternative Strategies & Recommendations 9 6. References 12 7. Appendices a. Appendix I 14 b. Appendix II 15 c. Appendix III 16 d. Appendix IV 17 e. Appendix V 18 f. Appendix VI 20 g. Appendix VII 21 Read More