Strategic Development of Starbucks

STARBUCKS INTRODUCTION

The Starbucks coffee company was founded in the year 1971. The starbucks headquarter is situated in Seattle, Washington (USA) Starbucks operates a chain of branded coffee shops in around more than 35 countries of the world. The outlets offer hot and cold coffee drinks and few food items such as beans, coffee accessories and teas. The Starbucks owns 7100 of outlets which located more than 10 countries but most of the stores situated in USA. The major process of enlargement of starbucks started from 1982 when Howard Schultz joined the company in order to see the marketing and the retailing activities. Since then Starbucks has evolved from a modest $0.5 million business to a whopping $6.4 billion of turnover.

In this assignment the time frame of 5-25 years and analyze development of Starbucks along with strategies applied and the present scenario of the organization with the help of Porter’s five competitive forces, SWOT analysis and value chain analysis. The future recommendations to Starbucks would also be included in this assignment.

1 ANALYSIS OF THE PAST

THE STRATEGIC DEVELOPMENT OF THE STARBUCKS

In 1971 Starbucks was settle in Seattle (USA)

In 1984 Mr. Howard Schultz join Starbucks to boost up marketing and retailing

Starbucks acquire 5 stores in San Francisco’s peet’ coffee and Tea chain in 1984

In 1985 Starbucks start the espresso bar concept in their store

In 1986 Schultz left Starbucks

In 1987 Starbucks expands in the American market by starting its outlets in British Columbia and Chicago

In 1992 Starbucks get listed with its first public stock offering with 165 business comprise outlets

In 1996 Starbucks open its branch in Tokyo (JAPAN)

In 2003 Starbucks continues to open branches all over the world and reached 6400 0utlets worldwide

In 2008 the global recession hits Starbucks badly, due loss in business Starbucks shuts 600 outlets all over the world

In 2009 Starbucks released a public long-term growth strategy that included meeting customer need for quality and value as key goal

1.2 THE STRATEGIES APPLIED BY STARBUCKS

Integrate horizontally – Starbucks has gone for acquisition of a large number of companies in abroad market, and expanded their outlets whole over the world. This strategy gave Starbucks a chance to reach customers whole over the world. For instance Starbucks acquired Seattle’s Best, Torrefazione Italia and Coffee People.

Penetrate the market – To increase the market share, Starbucks has differentiated itself in providing a unique experience to its customers by giving specific themes in stores. The product mix consists of different beverages to suit people’s needs. Starbucks have also tied up boost up company profitability with other beverage companies such as Pepsi co and Kraft food.

Developing the market – Starbucks has developed the market for specialty coffee industry for America. In this context, Starbucks has created brand awareness and demand for coffee stores amongst American population. This is enabled by better market penetration through apt store locations and standardized services offered all through the world.

Diversification strategy – To gain higher market share, Starbucks has provided a diversified product mix. To move forward starbucks produced new product linked with beverage business. This strategy helps Starbucks to grow both on the base of the operations and overall proportion of services. They have developed unique products and at the same time acquired companies like Ethos water. The product differentiation has been its core competence all through since its inception.

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Alliances strategy – The Starbucks also applied alliance strategy to became player in the leisure and service industry, and not only a specialty restaurant business, Starbucks has tied up with companies like i-Tunes to create the Hear Music campaign and XM Studios to offer customized music services for Starbucks customer, which has helped Starbucks to attain a level of niche over a period of time where even the nations where its presence is still at a nascent stage.

CSR strategy – Starbucks have also applied the CSR strategy to enhance the brand image and they also funded non-governmental organization to improve the level of literacy amongst the educationally backward communities. Starbucks also run the “Green Store” campaign to reduce the usage of paper cups. A 10% discount was given to customers who brought their own mugs to the store. Its latest campaign of Fair- trade coffee has spread on a subtle yet widespread manner.

1.3 CRITICAL SUCCESS FACTORS FOR STARBUCKS

The important factors that helped Starbucks to associate with success in the initial years of its operations are as follows:

Market Research – The factor market research helps Starbucks to apply the strategy to move forward their business through expansion. In year 1980 Starbucks expanded to Chicago. This helped management to learn how to expand business over the country. In the years 1991 Starbucks moved to California. This was a major strategic decision that came in after a lot of market research.

Employee Motivation and Rewards – One of the major success factors of Starbucks has been its employee motivation and giving time to time performance base incentives. One of the major steps taken by Starbucks to retain their employees was to increase the health and safety benefits for employees who worked more than twenty hours in a week. The top management to select the right employee for the right job in the store in order to reduce employee turnover ratio.

First Mover’s Advantage – In the year 1987 under the supervision of Howard Schultz Starbucks open 150 store in the first 5 years. Being the only player in the market Starbucks profits were huge enough to allow them invest in their expansion plans all over the world.

Catalogue Retailing – In the early years of the company’s operations, Starbucks started the process of catalogue retailing. This played a major role in determining the location of stores for Starbucks. Starbucks had a catalogue which comprised of a range of packed coffee beans with their prices. Consumers from along the world ordered them and looking at the zonal preferences the store locations were decided.

2. ANALYSIS OF THE CURRENT SCENARIO

AS starbucks is a popular coffee company so we look at a scenario of the period around 2008 and 2009. In this section we will look at the strategies of Starbucks through SWOT analysis, Porter’s 5 forces analysis

2.1 SWOT ANALYSIS

STRENGTHS

• Strong Brand Image Starbucks has been ranked amongst the top 100 brands in the world consistently over the last ten years.
• Innovative marketing strategies and its cost effective campaigns Starbucks have created brand awareness among the American population.
• High visibility of store in the market helps Starbucks to attract more customers and make company more profitable.
• Starbucks has maintained a high level of service through which it has achieved a consistent level of customer satisfaction with strong relationship with its supplier.
• The global presence of the Starbucks with quality based services of food and beverage, at the same time entertained their customer with music and internet in their stores.
• Starbucks is applying the innovative strategy to provide unique themes in their store to make their customer loyal to brand.
• One of the strong strength of Starbuck is his CEO Mr. Howard Schultz.
• Due to efficient HRM strategy to motivate and time to time performance based incentive and giving proper training to staff according to job specification.

WEAKNESSES

• The one of the weakness of Starbucks is lack of internal focus and too much think to expand their business.
• Increasing number of the competitor in the growing market such as Dunkin Donuts, Nestle and Tim Horton (Bramhall).
• The dependency of Starbucks in US market, Starbucks company earn its more than 70% of revenue only from the US market however they have presence more 35 country in the world and market cannibalization.
• The weak financial position in the market due to the recent global recession in the 2008.
• Starbucks has loss in the share price and they have shut more than 600 stores.

OPPORTUNITIES

• The continuously expand their store globally with expansion into the retail market and advancement of technology by using different kind of coffee machine in their store.
• Emerging international market specially BRIC nation Brazil, Russia India and China to plan to expand in these countries.
• Starbucks also continue to expand in the rural area of US and also segment the high populated area of the city.
• Brand expansion through selling T- shirt and coffee mug to their customer in their store on discounted rates.

THREATS

• Competition in the market (restaurant, street cart, supermarket, other competitor such as McDonalds and Dunkin Donuts. The chain such as Dunkin Donuts and McDonalds do not serve coffee is a core product but they give food as well to their customer in cheap prices than Starbucks.
• US market saturation and coffee prices volatility in developing coffee producing country such as Brazil, India etc.
• US consumer trends towards more health ways and away from caffeine.
• The current economic recession is a major threat for Starbucks since they had to close down a large number of stores around 600 stores leading to declining profits and large level of unemployment.
• Large size of the Starbucks Corporation cause in decrease in quality of customer services.

2.2 STARBUCKS VALUE CHAIN ANALYSIS

All firms consists of activities that links together to develop the value of business, Starbuck main activity includes in the value chain human resource management, marketing and retailing operations.

In this section of assignment the value chain can be used to analyze the different competencies of Starbucks and then competencies will be discussed in later section.

The core competencies of the Starbucks lie in its human resource management, marketing and retailing activities.

Infrastructure – In this activity includes planning of store locations, controlling such as financing, accounting and corporate strategy etc (lynch 2003).

Human Resource Management – Due to the global expansion the Starbucks faces a lot of problems in the management human resources. Starbucks have faced the problem of high level of employee turnover, but deploying right human resource still remains one of their key competencies. The company still believes that employees are its biggest assets. Starbucks continues to maintain a high level of corporate culture due to above industry standard employee benefit plans and employee stock exchange and ownership plans.

Procurement – The procurement relates to purchasing the material that is necessary for Starbucks. Efficient procurement of the starbucks is about buying highest quality coffee on lowest prices form developing countries.

Marketing – Marketing of Starbucks play a vital role to boost up profitability globally as Starbucks is strong coffee brand. Most of the advertising campaigns include, online advertising and store advertising.

Retail Sales – Starbucks is mainly focus on store retailing around 80% Starbucks sales come from store sales. Consistent upgradation of service levels by hiring the right people for right job in store through efficient HRM practices.

2.3 ANALYSIS OF THE STARBUCKS USING PORTER’S FIVE FORCES MODEL

COMPETITIVE RIVALRY

The Starbuck faces strong competition from small domestic coffee players and large competitors in the market.

The high price factor leads to decrease in sales compared to other coffee player all over the world.

BARGAINING POWER OF SUPPLIERS

The overcrowded market of the US is the main cause of to increase the barraging power of supplier because most of the farmers growing coffee beans are now united together to sell coffee beans. They started certified coffee beans through the fair trade policy in the US.

BARGAINING POWER OF CUSTOMER

High pricing is the main reason for decrease in sales.

The low switching cost in the industry plays a negative factor to the company’s growth by increasing the bargaining power of buyer.

THREAT OF NEW ENTRANTS

The specialty coffee industry does not put a high premium on economies of scale. Most players in the specialty coffee industry have developed their own distribution channels in their own countries, thereby gaining greater economies of scale and reducing cost. The low cost imposes an entry barrier for new players who want to set up an international chain, thus reducing their threat.

The high differentiation within the specialty coffee industry made possible to establish brand that could act as barrier to entry.

The specialty coffee retail store may switch high cost to new player, cost such as ambience and skilled employee in the store giving complimentary drink or any food to make customer loyalty. Therefore it may become difficult for new player to set business in the specialty coffee. So threats from the new entrants relatively low.

THREAT OF SUBSTITUTE PRODUCTS

The primary substitutes to the specialty coffee company such as Starbucks from the beverage companies make caffeinated soft drinks such as Pepsi and Coca Cola, which has the caffeine inherent in the specialty coffee; at significantly lower prices.(Quelch 2006)

The tea is also a substitutes in some country such as UK, the English people like different kind of tea instead of coffee

2.4 FINANCIAL PERFORMANCE OF STARBUCKS

In year 2008 Starbucks hit by the loss in share prices because of world economic recession and net income down by 70% and the figure 1.4 show that how badly Starbucks affected in the world economic recession hence the chairmen announce the report of decline share prices to $ 9.33 of Starbucks Corporation.

Starbucks is well positioned company to challenge any economic recession with strong cash flow and solid balance sheet. The year 2008 strongly hurt Starbucks with shutting down

600 store, loss of 6700 job and $ 500mn operating cost saving for 2009. Mr. Schultz cut in their salary $1.2mn to $ 10000. Here in the figure 2.5 show that clearly result operation with the information of net revenue, balance sheet of between 2004-08 and also shown that the stores information in the percentage and store opened in the between 2004-08.

2.5 ORGANIZATION STRUCTURE OF STARBUCKS CORPORATION

Finance

Marketing

CEO Howard Schultz

HOW

Deputy Legal

Compliance

CFO & Administrator

Board of Directors

Global Coffee Procurement

Legal

Global Logistic

Supply Chain Operation

Partner Resource (Hr)

Us Retail, Human Resource

Development &Greater China

Public Affairs

International Development

Consumer Food Services

Consumer insight

Support & US development

Global beverages

Global Development

Marketing

Seattle Best Coffee

France

International

EMEA

Retail Japan

China

Starbucks Coffee Us

Asia pacific

CIO And Digital Ventures

North East/Atlantic

North West / Mountain

South East/ plain

Western Pacific

3. FUTURE RECOMMENDATIONS

Strategic future recommendation to overcome from the declining profits of the Starbucks would be mentioned below.

3.1 EXPAND INTERNATIONALLY

Expand internationally is one of major strategy starbucks has applied to become most profitable specialty coffee company.

The one of the major problem Starbucks face continuous declined in the sale of in stores. The main reason for this is Starbucks is self cannibalizing its own business in the United States. Cannibalization is the negative impact of a company’s new product on the sales performance of its existing related products. Therefore Starbucks should focus more on opening stores in growing economies such as BRICK nation where the product purchase power is high among the people of India and the Middle Eastern countries, Brazil and Russia rather than on just concentrating on US market.

Starbucks should have to think about international expansion primarily for two reasons. The first reason being that because many developing economies lack the penetration of specialty coffee chains. For many countries Starbucks can adopt the Market Development strategy to strengthen their brand, gain more market share and minimize their risks.

Second reason for international expansion is that, migrating to different countries would give Starbucks a chance for product innovation. For example Tazo tea was first tested and tried in the Japanese market and then it was introduced in US market.

3.2 FRANCHISING

Starbucks should have concentrate on the franchising model like McDonalds is doing in to expand whole over the world. Most of the Starbucks stores are company owned company operated stores. This strategy is good but not good to survive long term profitability this increases the cost of control, it he case of franchising they can minimize control and concentrate more on building up their quality and maintain their high brand image, something similar to what McDonalds, pizza hut and Dominos have done over the years in US market and globally.

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The practice of expansion through franchising would also help Starbucks in entering potential markets such as India and speared in the Middle East country. In India, the foreign direct investment (FDI) restrictions allow only 49% investment of paid up capital by any foreign retailer. This restriction is playing a major role in Starbucks entry to the country. Franchising would allow Starbucks overcome such problems.

3.3 INTRODUCE LOYALTY CARDS

To make any company profitable the loyalty of customer may plays a vital for the Starbucks. It has been observe Howard Schultz has envisioned selling coffee at a lower price in order to attract new customers. According to my view the overall price cut would tarnish Starbucks’ brand image in the eyes of the loyal customers, who have been committed with the company due to strong brand image. However the price cutting policy should not be left away completely. It should be practice at certain places where the demographic income is low, in other places discount should be introduced customer loyalty card and point reward system for instance retail companies Tesco, Sainsbury, and Mark & Spencer. With every purchase made at a Starbucks store points will be added to the customers’ loyalty cards. The customers will have schemes to redeem these points at specific time to get price discounts or extra quantity of product.

3.4 “CORPORATE” THEME STORES

Starbucks can come up with a new theme of stores which is the corporate theme stores specially to keep in mind corporate people. In this theme, Starbucks should remodel store to keep in mind the interest of corporate people. Starbucks store should have to be situated in the commercial business places such as Westminster, Holborn in London and if look at the US Manhattan in New York. The facility should include free Wi-Fi internet, corporate business Magazine and financial times Newspaper availability in the morning. There should be any specific area in stores for corporate meeting to make extra revenue for the company.

3.5 “LEISURE” THEME STORES

Starbucks should also have stores with leisure theme that should have a comfortable and lively ambience that encourages people to come to the stores for a peaceful time. These stores should have facilities such as soft music, instant digital photography for taking snaps and arranging get-togethers like parties and official meetings.

Many pubs and bars have pictures of their regular customers and special events. Similarly, Starbucks can also have a wall dedicated to pictures of local customers or memorable events in the store. This will help Starbucks to maintain a close relationship with its customers and will attract potential customers.

3.6 CONTINUOUS IMPROVEMENT OF THEIR PROCESSES

A recent survey conducted in the year 2008 showed that people prefer more of McDonald’s coffee than Starbucks. Starbucks recently has failed to deliver newer exotic range of flavours. Variety is missing in their menu. Hence from time to time the company must review its coffee making process and consider renovating their equipments and technology from time to time.

3.7 EMPLOYEE TRAINING AND MOTIVATION

The most important asset for any company is their employees, as Starbucks is expand already in more 35 countries in whole over the world with strong brand name; with the closure of large number of stores and lay off of over 6000 staffs, Starbucks have lost a considerable amount of its employees. So to keep in mind the starbucks should have review on their recruitment processes and give them proper training regarding to their work area. For the job satisfaction and to motivate team member company should have give performance based incentive and paid holidays. It should hence now identify new leaders for the future, from the existing sales team members. The company should have give the chance of cross training in other department of the company and according to the performance company should have to give internal job promotion.

3.8 CORPORATE SOCIAL RESPONSIBILITY (CSR)

For food and beverage company should also have to keep in mind environmental issue and minimize wait. Now days all service company are using Corporate Social Responsibility (CSR) as strategy and its work for brand awareness among domestic people. Starbucks should also invest more in developing products and services that are more eco friendly and would also enhance the company’s brand image. For instance they should use porcelain and glass mugs in the stores rather than paper cups. This would minimize the usage of paper. Also they should encourage customers to use recycle bins in stores that would allow recycling of food waste.

REFERENCES

Larson.C.Ryan; 17/4/2008; Starbucks a Strategic Analysis

Anders, George, “Starbucks brews a new strategy”; Fast Company; July 2001; Issue 49:144.

Datamonitor Report “Starbucks Corporation”, May 2006; www.datamonitor.com

Adamy, J. (2007, November 15), At Starbucks, Too Many, Too Quick, Wall Street Journal.

2008, January 7 McDonald’s takes on Starbucks; http://online.wsj.com/article/sb119967000012871311.html

2008, February 22; “Starbucks Cuts 600 positions”, http://online.wsj.com/article/sb120362397558983703.html

http://www.starbucks.com