Strategies in Action,Implementing Strategies and Finance and Growth Strategies - Assignment Example

Strategies in Action; 2) Implementing Strategies; 3) Finance and Growth Strategies; 4) Strategies in Action Using Porters Generic strategy (competitive advantages) conduct an analysis of Starbucks. Michael Porter’s Generic Strategy consists of three sub-strategies. The following outline illustrates these three sub-strategies. 1. Cost Leadership Strategy CLS is basically about cost related efficiency. Thus scale economies play a very significant role here. Selling a standardized product at a lower price to a large segment of customers is the underlying principle of CLS (Pretorius, 2008). While Starbucks being a network of high street coffee shops meets some of these requirements, its inability to keep prices low has been attributed to rising costs. In fact with Shultz assuming duties as the Chairman of the company in 1987, things began to improve at Starbucks and the trend continued till 2000 when he became the President. In the first few years of the current decade Starbucks faced some of the worst problems. In the first place prices began to rise much faster and bureaucratic bungling hampered progress on many fronts. The current developments show that rising demands by employees for higher salaries and the addition of frills such as flavors have been the main cause of rising costs. Porter’s Generic Strategy requires such costs to be brought under control so that scale related economies become positive by way of reduced average costs and mass sales. Right now unfortunately it seems neither is happening at Starbucks and most probably this is partially due to the economic downturn. Despite Shultz’ efforts to bring down costs by curtailing pay and extra benefits to staff, there is a sizeable rise in the pay checks and the company is losing on the competition front. 2. Differentiation Strategy Competitive cost advantage is often attributed to scale economies and at Starbucks it did not happen as of late. Porter has mentioned two dimensions – strategic scope and strategic strength – as essential factors for CLS to be achieved. The rest of the original cube of 27 points is no more in vogue. However, his emphasis on product differentiation and cost efficiency matters here because Starbucks had a troubled past and is just now emergent from its troubles with Shultz at the helm again as the CEO. Thus its past record, particularly from 2000 to 2007 was characterized by a string of failures in cost management and efficiency though product differentiation efforts were partially successful. Porter’s emphasis on distribution related positive synergies is quite understandable in the context of mass marketing efforts of firms that sell a standardized product. Starbucks on the other hand sells coffee in its own cafes (Michelli, 2006). These high street coffee bars have their own cost structures that preclude them from being strategically oriented towards meeting some targets. For instance competitors have adopted similar strategies and are targeting the same consumers on a day-to-day basis. Shultz’ selling philosophy of creating a third place has gone a long way now. Competitors have equally well created the third place and are increasing their sales by offering only a standardized product. As porter points out in order for the organization to succeed in adopting this strategy, it must have the right type of supply chain network. Access to raw materials and skilled labor is the most important factor here. Right now Starbucks has access to better Arabica coffee beans but the global recession has forced suppliers to increase prices thus affecting the procurement strategy of Starbucks. This new development has forced the management to recoup costs by increasing the selling price of the cup of coffee. 3. Focus Strategy Future of the company’s sales strategy depends on the current market related outcomes as well as the strategic initiates being adopted at the organizational level. Predictably the company would be able to turn around in respect of costs and efficiency under the stewardship of Shultz though how soon is not clear. In the first place the current economic downturn has forced the company to diversify its average portfolio of products, e.g. the launch of VIA Ready Brew and value meals. These product innovations would have a very good impact on the sales volumes for sure but how would they impact on the relative profitability of the company isn’t known yet. While many market analysts have pointed out the existence of a downturn related sales curve at Starbucks in the coming months, Shultz is determined to turn around its growth trajectory to hit some predetermined sales targets. According to analysts there is a very strong suggestion for product innovation accompanied by cost cutting efforts. The former has been happening thought then latter has yet to happen. Fast food chains have not given up on their own product diversification and innovation strategy. This is cited as one of the major challenges to Starbucks. McDonald’s, Burger King and KFC have reinvented their standard formulas. Some of the products aren’t sold on a mass scale at Starbucks. Its premium brands are now bought and consumed less and less while the concept of creating value to the customer has caught up with the idea of selling ordinary coffee. The value concept has become a cliché now in marketing circles and Shultz has known that its appeal to the average customer is no more tempting as it was some time back. Future sales at Starbucks depend on a number of other factors like price, quality, quantity and above all variety of choice. Thus Porter’s idea about selling a standardized product on a mass scale would be diluted as much as the current trend shows that there would not be any brand loyalties left behind when economic difficulties force consumers to make hard choices between value and affordability. Thus Starbucks’ future sales would be determined by a host of market-centric forces other than demand and supply. 2) Critically examine the entrepreneurship spirit in the organization and try to apply T.W. Schultzs theory of entrepreneurship. Shultz’ strategic vision was to create a third place in between the home and the workplace. Thus the idea of a coffee bar where the individual would be able to relax and enjoy a branded cup of coffee was born. By 2000 Starbucks had almost captured the total market for the brew in North America. His vision is also centered on the need to identify and cater to specialty requirements of customers. He felt that in America there was not the right kind of place for the individual who would desire a much less expensive but more harmonious place to rest a while. This was just a philosophical view of the otherwise overworked concept of the pub or the bar. The idea caught up with the members of the general public to such an extent that Shultz developed his philosophy of doing business in a unique way. Entrepreneurial skills are born with the person and they are much less likely to be acquired (Katz, 1996). However, Shultz’ theory of entrepreneurship has been influenced within the organization by changes that have taken place in domestic and international markets as of lately. The entrepreneurial spirit of Starbucks is characterized by the need to survive rather than focus on strategic elements of growth and continuity. At least right now this seems to be the more appropriate strategy given the evolving circumstances against the global financial crisis. Starbucks’ entrepreneurship related variables show the organization is influenced by Shultz’ family concept. His concept of family members being entertained has such a big impact on the organization’s entrepreneurial spirit. The evolutionary process of Starbucks from being what it was under the founders - Gerald Baldwin, Gordon Bowker, and Ziev Siegl – in 1971 to what it’s now has been a long one. In the first place the organization was managed like a personal business under the founders and nothing more. In fact after a decade there were just four stores selling mainly Arabica coffee to its customers. Shultz identified a vacuum in the market for individuals who expected a well personalized environment to hang around for a little longer than otherwise could be the case. The rich exotic backdrop in the café would allow the customer to feel unique. This is in fact a u-turn from the existing business culture at the time. The Seventies and the Eighties decades were marked by a new ethos in the US due to the changing pop culture and Starbucks evolved into its current status from this uniqueness. Shultz felt that the American entrepreneurial culture had to change its directional thrust probably because the existing culture was inward looking and based on a compartmentalized mentality (Schultz & › Visit Amazons Howard Schultz Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central Yang, 1999). He wanted to open up Starbucks’ four walls so that while retaining its exclusivity, the café would welcome those potential customers with a desire to embrace its new approach. This is more than an entrepreneurial propensity to change. In fact what followed was a total re-invention of the sagging spirit of American resurgence. The workforce in Starbucks is managed with a little difference. Work ethics is differentially applied to generate enthusiasm among employees. Employees are motivated through a good mixture of both financial and non-financial benefits. Performance-based pay encourages baristas to contribute in large measure to the success of the organization. They are often reminded of the intensity of competition in the industry. Coffee isn’t what it was some time back in the minds of the people. Under the Starbucks’ banner it’s no more the brew to regain sagging spirits alone but also the source of “joie-de-vivre”. However the coffee connoisseur’s appeal is vanishing increasingly and it is being replaced with the concept of a drink that’s affordable and value-for-money. Lately this purely economic conceptualization of the Starbucks’ brand has made it commonplace with any other brand sold by high street coffee shops though. Shultz was quick to notice the recent developments when he assumed the duties of the CEO in 2008 again. He knew the concept needed reinvention along with product centric innovation in the face of what could be termed as “transformation of the high street coffee café culture” from the orthodox formality-ridden environment to a more simple customer-oriented selling practice. Thus Starbucks’ own brand of customer satisfaction has been diluted to accommodate changing demands of time (Davis, 2002). In the process the entrepreneurial culture of Starbucks has been transformed into a more vigorous selling proposition based on product diversification. Now Espresso Coffee is both a brand and value-promoter. Independent market analysts have suggested the ever intensifying competition along with the economic recession could serve as the ultimate catalyst of change in the way Starbucks in particular and other coffee bars in general are run rather than the exoticism and immediate profit concerns. Thus Shultz’ effort to reinvent tradition in keeping with the changing pace is as much a promise as a change in attitude towards the very entrepreneurial spirit of Starbucks. There is very little that Starbucks can do now by way of either a complete change in strategy to achieve its corporate goals or copying competitors’ techniques. Shultz’ entrepreneurial capabilities have yet to produce the kind of miracle that Starbucks is expected to produce in the wake of the current fluid market situation. 3. Analyze the management of a new Product Development and Product Innovation plan. What are the key demands of such a process and how can problems be avoided in future? A new product development and product innovation strategy requires three main stages to be accomplished by Starbucks. 1. Product design and planning stage Product design and planning phase involves brainstorming the ideas, concept development and discussions. Such a phase requires a well articulated approach such as calling for critical perception development and participation by the staff. Indeed for drinks and food product design stage has very little to offer though strategy development would require proper perspective planning. It’s the panning process that matters here. “Instant coffee and the value bun” at Starbucks has done little to revive the image of the brand. Starbucks’ current rate of product design and planning is based on introducing variants based on the already existing products. Except such rare exceptions like selling in-store music records there is very little unorthodox diversity at Starbucks (Hayes, 1999). A new range of products that would be introduced to the current menu on its ready-to-serve meals would definitely attract the attention of the outdoor diner. Strategic product design and planning processes like those adopted by restaurants and coffee bars require not only the overhauling of existing product lines but also the conceptualization of new additions that don’t overburden the customer by way of additional bills. In fact Starbucks has to go for the concept-based menu planning that would attract the attention of the average diner irrespective of the price and service. 2. Product development and innovation stage In the next phase Starbucks will have to develop those products and/or product lines that have been found out to be the most promising in the planning stage. While many original plans fall by the wayside, only a few strategies become practically relevant at this stage. Products that Starbucks has been selling have basically come from its original idea of being the third place. This concept now seems somewhat old fashioned against the backdrop of evolving competition. Reorienting product strategy might be the best alternative so that new product lines can be developed to satisfy niche market tastes and preferences of wayward customers. Starbucks’ resource capabilities including culinary expertise would have to be made use of to the full here. Nowadays coffee comes in exotic flavors that have very little, if at all, to do with the original perception of coffee as a natural brew. New product development depends on the diversity and richness of resources to a greater extent. As much as Starbucks’ current new product development and innovation strategy is determined by the market-driven forces such as sales volumes and market growth, the flexibility of its resources for adaptation into new areas of product line development requires a degree of quality and supply chain management. 3. Product lifecycle management stage Finally Starbucks has to focus its attention on the new product lifecycle management process. Product innovation requires new features to be incorporated into existing products among other things. Food and drinks don’t take months or years to develop. They need just hours or days. However, test marketing will take a number of weeks. In the absence of metrics to measure the customer preferences the rate of acceptance or rejection cannot be determined over time. Extrapolation is just what Starbucks has been doing with most of its products, including set menus (Trott, 2008). The industry perspective on managing product lifecycles acts, as a compulsion on the firm to identify existing trends such as those related to healthy living. 4. The Starbucks’ stock rallied 8%, and many observers interpreted this as a sign of the rational reaction of efficient markets. Analyze in how far is this related to the efficient market hypothesis. Efficient Market Hypothesis (EMH) holds that stocks or shares trade at their fair value thus preventing buyers and sellers from gaining unduly from market inefficiency. In other words since the market functions efficiently investors cannot buy undervalued shares or sell overvalued shares. Thus if any investor desires to earn higher returns he has to buy much riskier shares or bonds. When Starbucks’ stocks rose by 8% the analysts said that it was due to the efficacy of stock markets and therefore the positive rally reflected the true performance of the company. Efficient markets do exist in theory. For example according to financial theory there are efficient stock markets that especially don’t permit market manipulation by investors. However the practical scenario negates this proposition very often (Drummond & Chell, 1994). For instance the 8% rally of the Starbucks’ stock could be attributed partially to the equity issue and not to the efficiency of the markets. The agency problem illustrates this better. For example when a principal hires an agent he does so with the intention that the latter would act in conformance with certain rules to bring about what the former wishes. However the motivating factor behind such performance is the monetary compensation such as a good salary to the manager. Therefore such behavior on the part of the manager would not be in his best interest (Vishwanath & Harding, 2000). His tendency to deviate from what is expected of him is common among all managers. In order to reduce such negative behavior the manager must be adequately compensated. However the principal does not know what the agent would do to ensure that his own interest prevails. (a). Asset substitution problem As and when debt to equity ratio increases managers tend to substitute new assets through new investment thus relatively increasing debt in place of equity. Assuming that projects are riskier, there is still a fairer chance of success against failure thus obliging both debt-holders and share holders to condone such risky investment decisions on the part of managers. Successful investment projects lead to cumulative share holder benefits while unsuccessful ones lead to cumulative debt-holder woes. (b). Underinvestment problem Managers would not hesitate to reject projects with positive Net Present Value (NPV) because they would not be bothered to increase the value of the firm any more than to allow the accrual of benefits associated with riskier debt to debt-holders themselves rather than to share holders. (c). Free cash flow problem Finally there is the problem of free cash flow. In the absence of free cash flow benefits accruing to investors, the manager has a tendency to reduce the value of the firm through prodigal behavior, such as granting bonuses and higher salaries. Therefore higher levels of leverage would act as a preventive factor of such behavior and ensure discipline. Next there is the problem of taxes. When corporate taxes are considered the firm is entitled to interest expense deduction which enables it to increase value of its assets.. According to Modigliani and Miller (1963) the tax exemption allows the firm to reduce the leverage-based premium in the cost associated with raising the equity capital. Subsequently Miller added personal taxes to the equation. REFERENCES 1. Drummond, H & Chell, E 1994, ‘Crisis Management in a Small Business: A Tale of Two Solicitors Firms’, Journal of Management Decision, vol. 32, no. 1, pp. 37 – 40. 2. Davis, S 2002, ‘Brand Asset Management: how businesses can profit from the power of brand’, Journal of Consumer Marketing, vol. 19, no. 4, pp.351-358. 3. Hayes, J 1999, ‘Starbucks diverse product mix and new cafe concept create new MIS challenges’, Nations Restaurant News, vol. 33, no. 2, pp. 36. 4. Katz, JA 1996, Advances in Entrepreneurship, Firm Emergence and Growth: v. 1 (Advances in Entrepreneurship, Firm Emergence and Growth), Emerald Group Publishing Limited, England. 5. Michelli, J 2006, The Starbucks Experience: 5 Principles for Turning Ordinary Into Extraordinary, McGraw-Hill, New York. 6. Modigliani, F & Miller, MH 1963, ‘Corporate income taxes and the cost of capital: a correction’, American Economic Review, vol. 53, pp. 433-443. 7. Pretorius, M 2008, ‘When Porters generic strategies are not enough: complementary strategies for turnaround situations’, Journal of Business Strategy, vol. 29, no. 6, pp. 19 – 28. 8. Schultz, H & › Visit Amazons Howard Schultz Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central Yang, DJ 1999, Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time, Hyperion, New York. 9. Trott, P 2008, Innovation Management and New Product Development, 4th edn, Paul Trott (Author) › Visit Amazons Paul Trott Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central Prentice Hall, New Jersey. 10. Vishwanath, V & Harding, D 2000, ‘The Starbucks Effect’, Harvard Business Review, vol. 78, no. 2, pp.17. Read More