The internal analysis of Starbucks will consist of an organizational analysis strategy analysis and a business model analysis.
4.1. Organizational Analysis
The corporate mission of Starbucks, along with its vision statement and business model are crucial in determining where Starbucks wants to go as an organization. The Starbucks mission statement is: to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time (Starbucks, 2011).
To deliver on its mission, Starbucks executes some core principles. Firstly, Starbucks commits to the finest coffee. Starbucks is not only concerned with quality for the end consumer, but also ensures coffee beans are purchased in an ethical manner that will improve the lives of the farmers. Secondly, Starbucks deems their employees as a crucial resource and asset. Starbucks guarantees perfect coffee to their customers, which can only be delivered by high engagement of staff (Starbucks, 2011). Thirdly, the third place experience provided by Starbucks gives customers a gratifying atmosphere of human connection and a sense of belonging (Rice, 2009).
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The products and services that Starbucks offer are critically important to Starbucks achieving differentiation in the market by way of constant product innovation (Kelly, 2006). Starbucks currently offers more than just quality gourmet coffee. Starbucks is proud of its customer service and is dedicated to ensuring that each customer enjoys each trip to Starbucks (Starbucks, 2011). Other services include the third place experience atmosphere and onsite coffee service. The third place experience is what Starbucks refers to as the third location that consumers will relax and enjoy drinking coffee beverages (Rice, 2009). Starbucks also offers free Wi-Fi to everyone at its store locations to entice customers to stay longer and work or surf the web while they enjoy their coffee (Starbucks, 2011).
The organizational analysis evaluates the key characteristics of the organization. Starbucks aims to nurture the human spirit around the globe by offering the finest coffee in a friendly and inviting atmosphere. It promotes product innovation and customer service through a decentralized leadership style that emphasizes distributed decision-making and information-sharing. The quality of a company is judged by the symbiotic fit between its strategy and organizational structure, yet consideration is also placed on whether the firm’s strategy and structure meet the demands of the external environment (Hannan, 2011). The next section will give a detailed analysis on Starbucks’ strategy.
4.2. Strategy Analysis
The strategy analysis consists of three parts: marketing strategy analysis, operations strategy analysis and international expansion strategy analysis.
Marketing strategy
The first part is about Starbucks’ positioning strategy. A positioning strategy aims at positioning rival companies into strategic groups. These strategic groups consist of industry members that have similar goals and positions in the competitive industry (Piercy, 2008). These groups are placed on a strategic group map to analyse how industry firms are positioned. Firms in the coffee industry will be mapped based on price and quality of their products versus product line breadth. The size of the circle representing each firm on the strategic group map is symbolic proportional to the size of the firm’s share of total group revenues.
The coffee beverage strategy group consists of quick-service restaurants and specialty coffee shops. The major players in the strategy group are listed in the following table. The firms are divided by breadth of products offered to the market, industry related sales, and percentage of sales relative to rivals. The data listed in table x are used in constructing the strategic group map.
Diagram 7: Strategic Group Map of Coffee Industry
Green
Mountain
Price/
Quality
Source: Williams (2007)
Competitors of Starbucks can be divided into two different categories: direct and indirect. The direct competition would include firms that manufacture and produce hot drinks (Datamonitor, 2010). These firms are the retailers of ready-to-drink coffee and tea products, quick-service restaurants, and supermarkets. Also, in this category are the large multinational companies that produce ground coffees and instant coffees (Datamonitor, 2010). The indirect competitors are comprised of firms producing energy drinks, caffeinated soft drinks, and energy shots. Starbucks’ close competitors include other specialty coffee shops, doughnut shops, and restaurants.
Starbucks holds a dominant position in the specialty coffeehouse market and has no single clear rival in the sector. Its closest specialty coffeehouse competitor is Caribou Coffee with 440 stores in the US. Its most intense specialty coffeehouse competition is dispersed among the thousands of independent or small-chain coffee shops around the nation and the world. Two of Starbuck’s stiffest quick-service restaurant rivals are McDonald’s and Dunkin Donuts. McDonald’s followed its 2009 strategy of competing against Starbucks through expansion of McCafe locations into more stores both domestically and internationally (Liu, 2009). Nevertheless, there are big differences between their core customers. Privately owned Dunkin Donuts is another major competitor, with nearly 5,000 stores in the US. Following Starbuck’s footsteps, Dunkin Donuts will look to expanding globally, especially in the Asian markets (Dicarlo, 2004). Although Dunkin Donuts’ retail footprint also overlaps largely with that of Starbucks, its customer experience is much more similar to the coffee-to-go model rather than the “third place to work and relax” model. Consequently, it is likely to compete more directly with McDonald’s than with Starbucks (Dicarlo, 2004).
Starbucks is an industry leader in both product innovation and product offering. Most other firms take a follower position and simply copy successful Starbucks’ products at lower prices. This is a favourable position for Starbucks. The strategic group map shows Starbucks as the leader in both price/quality of product offerings as well as the breadth of products offered. The white space on the map is possible openings for existing firms or new firms to move into. These would be high priced, low breadth offering positions, or low cost, high breadth offering positions.
The second part analyses Starbucks’ competitive strategy using Porter’s Generic strategies framework. As a whole, Starbucks implements a broad differentiation strategy. It provides high quality coffee and a unique experience in accessible locations, which makes it stand out among all the coffee providers. VIA, the new instant coffee line, straddles broad differentiation and cost leadership strategy. Though it will be a low cost and convenient alternative to Starbucks regular coffee, Starbucks coffee is still unique from other products in the market. Providing in-store gifts and brewing utensils is the focused differentiation strategy; it was designed for coffee lovers, especially Starbucks’ loyal fans.
Diagram 8: Starbucks’ competitive strategy
Competitive Advantage
Uniqueness Low cost
Broad Target Narrow Target
As a whole
VIADifferentiation
Cost Leadership
In-store brewing utensils/ gifts
Differentiation Focus
Cost Focus
To differentiate it from rivals, Starbucks convinces customers that it provides more than a cup of coffee and associates its brand image with a sense of community activism. Moreover, Starbucks acts as a social responsible company to strengthen its differentiation strategy. It promotes ethical sourcing, environmental stewardship, and community involvement. Starbucks also prides itself on the innovation of new products, which further differentiates it from its competitors. However, with the customer base becoming more sophisticated and differentiation indicators adopted by ordinary coffee firms, Starbucks’ advantage on the differentiation strategy may fade away (Piercy, 2008).
The third part is about Starbucks’ brand building strategy. Its marketing strategy has focused on “word-of-mouth” advertising and building the brand cup by cup, letting the high quality of their products and services speak for themselves (Starbucks, 2010). For years, this unique marketing strategy has played an important role in making Starbucks Coffee Company a success. In 2010, two-thirds of all coffee was sold in supermarkets. Starbucks coffee sold in supermarkets featured distinctive, elegant packaging and the same premium quality as that sold in its own stores. This new change requires Starbucks to create a new way to build its brand. Therefore, the Starbucks marketing strategy has expanded to create a community around their brand. On its website, individuals are encouraged to express their experiences with Starbucks’ history, and the company strives to “personally” join in the discussions.
Operations management Strategy
Starbucks has positioned itself as a provider of ethical premium coffee products and pleasant, luxurious meeting places for people. So, its prices are relative high and it competes on a unique value proposition. Commitment to the best quality and high ethical standards are evident in every step of the supply chain, from bean procurement to service (Jennings, 2009).
Starbucks’ supply chain starts from bean sourcing. To ensure compliance with its rigorous coffee standards, it controls coffee purchasing, roasting and packaging, and the global distribution of coffee. Starbucks pays over the market price for its beans in order to procure premium beans. Besides acquiring the highest quality coffee, the ethics of paying a fair price for coffee producers provides an ethical aspect to the value proposition (Rubin, Dierdorff and Brown, 2010). Starbucks also has the expertise to secure top-notch coffee beans to supply the company’s growing needs. All this allows Starbucks to serve coffee that is of superior quality compared to competitors.
As part of its sourcing strategy, Starbucks entered into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee beans and to limit exposure to fluctuating coffee prices (Starbucks, 2010). When satisfactory fixed-price commitments were not available, the company purchased coffee future contracts to provide price protection. Nonetheless, there have been occasions in years past when unexpected jumps in coffee prices put a squeeze on the company’s margins and necessitated an increase in the prices of its beverages and beans sold at retail price. However, by this approach, Starbucks can smooth costs and avoid price hikes in the stores that would have a devastating effect on the company’s image.
Starbucks deems store operations as an important part of strengthening the company’s reputation and image. The company formed a group to create a store development process to ensure that each store conveys the appropriate image and character. Then, the information and operating system of Starbucks allow it to communicate information throughout the organization to increase the quality of decisions and efficiency in value-chain activities (Gamble & Thompson, 2011).
Starbucks also tries to develop the company’s brand through its specialty operations with third parties outside the traditional coffeehouse. This includes Licensed Stores, Packaged Tea and Coffee, Branded Products and Foodservices Operations. In 1997, Starbucks began entering into a limited number of licensing agreements for store locations in areas where it did not have the ability to locate its own outlets. For example, Licensed Stores with Marriott Host International and Aramark Food and Services put Starbucks stores in airport locations and on university campuses. Starbucks received a license fee and a royalty on sales at these locations and supplied the coffee for resale in the licensed locations.
International Expansion Strategy
Starbucks’ international expansion started in 1995 and its international expansion strategy is to provide licenses or create joint ventures with reputable local companies, which are equipped with retailing know-how in the target country (Garza, 2010).. This strategy is built upon the growing reputation of the Starbucks brand and the ability to identify attractive store locations. The international expansion strategy is also supported by centralized buying, standard contract development and fixed fees for certain items, and consolidated work under contractors with good cost-control practices (Alberto, 2011c). Starbucks’ product supply is also a key in the successful expansion. As reported by the Wall Street Journal (2006), the Starbucks Corporation is expanding at a very high rate and focusing on China. This company has aggressively campaigned to become the leading coffee in the United States and after attaining this, it has made further steps to considering global leadership.
The expansion and growth of Starbucks has been well known, especially by its desires to venture in emerging economies. Currently, the Starbucks Corporation is downsizing in the US as a result of the economic downturn in this country and its increasing global expansion. In 2008, this company closed more than 600 coffee shops across the US. Since the need for international coffee has increased, Starbucks is opening up 1,000 coffee shops across the world especially in Asia. Starbucks’ expansion strategy was well thought out: the strategy target was in the Asian Pacific, far away from Europe and Latin America where coffee shops competition is very strong. As the diagram below shows, the revenue from the US market is shrinking and the operating income of the EMEA market became negative in 2010 and 2011, while the market of China and the Asian pacific shows good potential. Therefore, China is Starbucks’ largest target, as it is expected to be the biggest growing market over the next two years (Starbucks, 2011). After the global economy recovery, Starbucks is planning to open an average of more than one store each day. Starbucks continues to close domestic stores that have already saturated the market, and replace them with international stores abroad.
Total revenues ($ Million)
Starbucks is able to enter into Asian markets and China in particular by targeting China’s middle class and bringing new lifestyles while maintaining coffee and other beverages as affordable luxuries. Barraclough (2006) reports that the Chinese are known for their increasing preference for coffee and hence Starbucks is able to convince more customers to take coffee. American products and lifestyle are highly admired by the Chinese and Japanese, and hence consumers there adopt American trends and products easily and quickly. This indicates that Starbucks is making use of the Chinese culture to enter into China’s market (Haoting, 2009).
However, the rapid international expansion also has negative effects. First of all, too many new locations established would exert an adverse effect on customer service. Therefore, the customer experience may degrade. Secondly, some retail stores opened even before the local supply chain was fully built up, leading to bad customer perceptions towards Starbucks coffee and food. Thirdly, the strategy of closing down US locations to offset new growth abroad results in reducing the convenience factor in the US market. Many American customers have to drive a long way to buy a cup of beloved Starbucks coffee. As mentioned previously, the convenience is one of most important parts of its value proposition. Last but not the least, the large number of stores is a huge asset or liability, depending on how one assesses the situation. If there is a strong economy and people have disposable income, then it is an advantage to have abundant stores to generate revenues. On the other hand, the vast number of stores will become a huge financial liability during economic downturns. Therefore, now Starbucks, led by Schultz, advocate the disciplined expansion of store bases and focus on real, sustainable growth.
4.3. Value chain analysis
Michael Porter (1998) states that acquiring competitive advantages can be done through an analysis of the company’s value chain. Companies can attain competitive advantage when the value chain is optimised by coordinating these activities to create value for its products or services that exceeds the costs of performing the value activities (Porter, 1998). In other words, a company can create additional value without necessarily increasing costs.
A company’s value chain system can be classified into two categories; (1) the primary activities, which involve the physical creation of the products, marketing and delivery system, and after sale service and support activities; and (2) the secondary activities, wherein company infrastructure and inputs allow the primary activities to take place (Porter 1998). When these activities are already defined, the value chain system can be analysed in order to aid the development of a strategic goal and gain competitive advantage or, in our case, to understand the current downfall in the Starbucks business model.
Below is the current value chain of Starbucks with international and technological developments. The upstream value chain allows the development of new products that suit international markets better, e.g. green Tea Latte in Starbucks Japan. The downstream is the online storefront customization, which allows customers to order online and create new drinks etc. The newly-added mobile app could locate Starbucks locations and order drinks.
Product Distribution
Bean and Ingredient
Selection
Local
Adjustment
Product
Development
Take-home
products
Online
Storefront Customization
Mobile Apps
Storefront
Starbucks’ value chain creates additional value for its products, which the customers are willing to pay for. Hence, the customer is not reluctant to pay above-market prices for Starbucks coffee. In fact, its customers are not looking for the price of the coffee but they are seeking for the quality of the products and the brand image that the company offers.
For a company to achieve or maintain competitive advantages and add value to its products or brand, it is necessary to link these activities and optimise the company’s value adding activities (Porter, 1998). In the case of Starbucks, as stated earlier, its value activities were at first effective in the co-ordination between its primary and secondary activities. For example, the setting up of stores was well planned. Each location was carefully studied, taking consideration of irrelevant details such as traffic flow, density of people and demographic characteristics of an area, and careful selection of personnel to be deployed in each outlet (Clark, 2007). These aimed to deliver good quality coffee products and exude an ambiance of luxury and comfort for its consumers (Clark, 2007).
However, gaps in the value chain activities occurred in recent years. An example is the rapid expansion in several locations across Asia. The company failed to maintain the company’s brand image of luxury and exclusivity. The company rapidly expanded by opening an average of a store per week, which resulted in the downgrading of the “Starbucks experience” that its customers have been looking for (Velta, 2008). In fact, the customers have not seen any noticeable improvements in their experience (Jennings, 2009). Analyst Andrew Barish also commented that Starbucks’ operations have “‘slipped’ and longer lines, more complexity and less-than-stellar looking assets could be causing a modest decrease in sales in this challenging consumer environment (Moore, 2007). As a result, Starbucks’ strategic competitiveness is slowly disintegrating and its rivals are eating up some of its customer base (Rushe, 2006).
4.4. Business model analysis
The business model concept is defined as the value a company offers to customers and the architecture of the firm and its network of partners for creating, marketing, and delivering this value in order to generate profitable and sustainable revenue streams (Osterwalder and pigneur, 2002). It also consists of a narrative of both how the business works and how it makes a profit. Schindehutte and Allen (2009) developed a framework in order to define the core competencies of a business model from an entrepreneurial perspective.
The most important component of the framework is concerned with value creation. Starbucks creates unique value through great customer experience and interactive service. The unique value proposition of Starbucks is best described by Howard Schultz: The idea was to create a chain of coffeehouses that would become America’s ‘third place’, a place where people could go to relax and enjoy time with others, or just be by themselves. Starbucks enhances the coffee experience for the customers by creating a relaxed environment within the store whilst offering consistently rapid and on time delivery.
Many companies pursue a resource-based strategy which attempts to exploit company resources in a manner that offers value to customers in ways rivals are unable to match (Piercy, 2008). Starbucks’ customer value proposition is also based on its unique resources and capabilities. Starbucks capitalizes on intangible resources like brand power and image as a high quality coffee provider to attain its objectives. Starbucks also utilizes its immense human capital and expertise in product innovation, location selection, and its marketing ability to stand out as the premier coffee brand. Particularly, Starbucks utilizes technology extremely well, e.g. the heavy use of internet capabilities, social network marketing, rechargeable payment cards, and even new mobile apps help to ease and speed up the payment and ordering. Moreover, Starbucks has other competitive advantages based on its skills and specialized expertise, and valuable alliances (Piercy, 2008). Starbucks has a skill set in creating and introducing innovative products into the market. These skills give Starbucks a competitive advantage to be an innovation leader, but not a copycat follower. It is essential to differentiate itself from rivals in the coffee industry. Last but not the least, Starbucks has abundant free cash flow and physical assets to fund and drive its strategic initiatives. Without these physical assets, Starbucks would not be able to aggressively expand in the market or fund further product research and development.
Another important component of the business model is the firm’s core competence. Core competencies are defined as a proficiently performed internal activity that is central to a firm’s strategy and competitiveness (Piercy, 2008). The core competency can also lead to sustainable advantages. To be a sustainable advantage, the core competency must be hard to imitate or copy by rivals (Piercy, 2008). For Starbucks, its core competency can be defined as high quality coffee and products at accessible locations and affordable prices, providing a community the coffee drinking experience. Its sustainable advantage resides in the intellectual capital of defining and leading the market. Starbucks stands out as a leader, mainly because of its good business model that can generate innovative products that consumers desire.
Starbucks is able to leverage its resources, both tangible and intangible, to create competitive capabilities and core competencies to form its business model. Starbucks achieves this by utilizing its human capital and expertise to constantly strive for excellence in product innovation. Furthermore, Starbucks is able to internally fund its growth strategy from sound financial performance.
However, Starbucks needs to take more efforts to innovate its business model. Specialty coffee shops copy or adopt the Starbucks model, which leads to Starbucks’ competitive advantage shrinking and this poses a serious threat to the company. In addition, the gap between customer’s expectations and perceptions of Starbucks is bigger. Many customers are not satisfied with Starbucks’ offerings as they were before. They think Starbucks charges a premium for coffee and experience, but actually it falls behind its promises. This may be because customers become more demanding while Starbucks’ ability to innovate value offerings is weak. Therefore, to keep its popularity and consistent growth, Starbucks needs to innovate its value-adding activities so as to innovate its business model.
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SWOT Analysis
A SWOT analysis is a powerful tool to evaluate a firm’s resource strengths, its competitive deficiencies, the opportunities that exist in the market, and the external threats to the organization’s future well-being (Gamble and Thompson, 2011). The strengths of Starbucks come from an internal origin and are designated as helpful to Starbucks reaching its target objectives. The weaknesses of Starbucks are categorized as operational areas and activities that reduce Starbucks being able to achieve strategy execution. Starbucks needs to leverage these strengths to overcome their weaknesses and realize potential opportunities. Threats are areas of concern in the external environment that can affect how Starbucks, and the coffee industry as a whole, will do business.
Diagram x: SWOT Matrix for Starbucks
Internal External
Strengths*
Weaknesses*
â-Brand image is extremely important to Starbucks.
â-Good ambiance and convenience are two of the foundations that Starbucks grew on.
â-International Markets offer lower risk investment and innovation opportunities.
â-Cheap alternatives like
McDonalds threaten the convenience factor.
â-Founders of premium coffee and an industry leader
â-Product diversification
â-Excel in product development
â- Valued and motivated employees, good work environment
â-Strong financial foundation
â-Lack of internal focus (too much focus on expansion)
â-Self-cannibalization
â-Overdependence on the US market
â-Aggressive expansion leads to managerial or financial problems (e.g. customer experience is watered down)
â-Pricing is relatively higher than customers’ expectations
Opportunities*
S-O Strategy
W-O Strategy
â-Co-branding with other famous brands
â- Increasing need of premium coffee in emerging markets
â-Rising awareness on CSR issues
â-Capturing new markets (retailing) and new consumer groups
â-To increase market share in emerging markets
â-To make full use of cross-broad marketing
â-To revamp brand image and work on brand extension
â-To be a more socially responsible brand
â-To coordinate and adjust expanding speed
â-To innovate its business model so as better deal with new challenges
â-To think about new ways to differentiate itself
â-To integrate distribution channels
Threats*
S-T Strategy
W-T Strategy
â-Stiffening competition
â-Possible saturation in the coffee market
â-Volatility of coffee price
â- Blamed by green lobby and ethical lobby
â- Recession would affect
customers’ willingness to spend
â-To consider further vertical integration
â-To consider creating a sub-brand to provide less pricey coffee
â-Continue to use fair trade coffee as ingredients and pay more attention to environmental and ethical issues.
â-To shrink product lines and wash out less favourable products
â-To provide customized products and combinations
â-To close down less profitable locations
*Source: Dataminitor and http://www.businessteacher.org.uk/business-resources/swot-analysis-database/starbucks-swot-analysis/
Being a leader in the coffee industry, Starbucks is powered by its constant product innovation, customer service aptitude, ability to expand globally. Apart from the basic strategies used by Starbucks, the external environmental conditions and the internal characteristics of the Starbucks organisation present a favourable condition for growth. Even though Starbucks profit has declined in the previous year, due the growing intensity of competition and the economic crisis aggravating the situation, Starbucks is still the dominant player in the specialty coffee sector through its years of experience and brand reputation. Thus, the company can use this position to leverage itself and put pressure onto its competitors. Nevertheless, strategic change is the call for Starbucks. Perhaps, it is the time for the company to revisit its existing business models, practices and strategies and to examine whether these models still conform to the conditions of the market. Since market conditions change as evidenced by current events and the continuing globalisation of markets, the company may need to reform its strategy.
The PSETEL and Porter’s five-force analysis show that coffee firms are very sensitive to the macro environment. The overall competitive pressures are moderate and firms can be successful if they are efficient and effective in the execution of strategies execution.
Starbucks achieves its mission through a decentralized leadership that emphasizes distributed decision making and information sharing to promote product innovation and customer service. One concern about Starbucks’ organizational culture is that Starbucks over relies on Schultz’s talented leadership. Schultz was able to turn the company back by several strategic moves, but without Schultz and his leadership capabilities, Starbucks may have fallen into a disaster. Overall, it might be a pitfall for Starbucks; Schultz is to Starbucks what Jobs is to Apple.
The SWOT analysis of Starbucks reveals that the strength of Starbucks lies within their strong financial performance. The weakness of Starbucks is an over reliance on the saturated U.S. market with a declining market share as a result of intensified rivalry in the marketplace. This weakness can be overcome by utilizing Starbucks’ strong finances to realize the present opportunities to expand into emerging markets.
Overall, Starbucks has maintained a competitive advantage since it created its original blue ocean of bringing quality, bistro-style coffee choices to the masses. The key issues facing this firm were its attempts at massive expansion and creating new value innovation. The aggressive expansion could cause the company to become over exposed and adversely affect its ability to change. In order to enhance sustainable growth, it needs to focus on its core competencies. Facing fierce competition with McDonalds and other coffee chains, Starbucks needs to create new value innovation by enhancing the customer experience and investing in online content and interactivity. Rather than creating more new products, it is better to enhance the connection with their loyal customers and to differentiate it from its rivals.
6. Recommendations
Viable recommendations must be able to solve Starbucks’ greatest issues. One is the increasingly saturated US market and another is the need to penetrate attractive foreign markets. Furthermore, degrading customer perception must be prevented both in the US and overseas. Here, a great challenge is how to re-establish a positive customer attitude towards the company in the US and retai
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