Evaluation of Starbucks Strategic Position In the Market - Essay Example

?Table of contents 0 Introduction 2 1 background information about Starbucks 2 2.0 External analysis of Starbucks 3 2 PESTEL analysis 3 2.2 Porter’s five forces model 5 3.0 Internal analysis 5 3.1 Starbucks strategic capabilities 6 3.1.1 Human 6 3.1.2 Physical resources 6 3.1.3 Financial resources 7 3.2 Value chain 7 3.3 Starbucks financial performance 7 4.0 Current issues and challenges diagnosis 8 5.0 Generation of strategic options 9 5.1 TOWS matrix 9 5.2 Ansoff’s matrix 9 6.0 Evaluation of strategic options 10 7.0 Description of selected strategy 11 8.0 Conclusion 11 References 13 Table 1: PESTEL analysis for Starbucks 4 Appendix 1: Tows matrix 14 Appendix 2: Ansoff’s matrix 15 1.0 Introduction The report seeks to evaluate Starbucks strategic position in the market it is operating in. The major aim will be to suggest strategic recommendations that can be adopted by the organisation in order to remain viable in the long run. The report starts by describing the strategic position of Starbucks and this encompasses a description of products and services offered markets, key stakeholders and strategic purpose which includes mission and vision /strategic intent. The report will also analyse the internal and external environmental factors affecting the operations of Starbucks. A diagnosis of the organisation’s current issues and challenges will be carried and this will be followed by the generation of strategic options that can be implemented in order for it to return to profitable growth. An evaluation of the strategic options recommended will be carried. The last part of the report will give a detailed description of the selected strategy as well as the resources needed for the full implementation of this strategy. A conclusion to sum up the main points discussed in the report will be drawn at the end of the report. 1.1 Background information about Starbucks Starbucks was initially founded in 1971 by three academics in Seattle and it specialises in selling coffee. However, in 1987, Howard Schultz acquired the company and became the first CEO and expanded it to be where it is right now. The company expanded it market from Seattle to cover other areas in the whole of US and Canada and it also operates stores abroad. The company’s customers are mainly coffee lovers from all walks of life and it can be noted that it has been pursuing a differentiation strategy by Porter (1985). Starbucks’ cornerstone value is to “build a company with a soul” and its broad mission is “To inspire and nurture the human spirit—one person, one cup, and one neighbourhood at a time.” The organisation broadly aims to be “a purveyor of fine coffees in the world while maintaining uncompromising principles.” Its intent has been to do the right thing and conducting its business in ways that earned the trust and respect of the customers, partners/employees, suppliers and the general public. The stakeholders include Howard Schultz, employees, customers, community members and the shareholders. 2.0 External analysis of Starbucks This section of the report seeks to analyse the external factors affecting the operations of the organisation. Two models namely PESTEL analysis and Porter’s five forces model are going to be utilised in carrying an analysis of the external factors impacting on the operations of Starbucks. Critical success factors will also be analysed in this section of the report. 2.1 PESTEL analysis A close analysis of Starbuck’s case study shows that there are various external forces obtaining in the macro-environment in which the organisation is operating and these have an impact on its operations. As such, a PESTEL analysis is going to be used to evaluate the external factors affecting the operations of Starbucks. Basically, PESTEL is an acronym for political, economic, social, technological, environmental as well as legal factors impacting on the operations of the organisation (McCarthy & Perreault, 1996). The table below outlines the analysis in detail. Table 1: PESTEL analysis for Starbucks Political factors -political factors obtaining in different locations where the organisation operated shaped its operations. Through its expansion strategy, the organisation targeted areas that were peaceful. Economic Factors -The recent global economic crisis had a negative impact on the operations of the organisation given that it affected consumer spending on products like coffee which were viewed as luxury. For instance, 2008-9 fiscal years were challenging. Sales declined by 3 % in 2008 and 5% in 2009 while revenue also declined from $10,4 billion in 2008 to $9,8 billion in 2009. This prompted the company to close about 800 underperforming company operated stores in US. However, positive signs of revitalisation of the company are still visible. Social factors -Other customers shunned coffee shops which had no seats as they preferred a relaxing environment. However, the company tried to put measures that were meant to ensure fair treatment of all stakeholders which positively contributed to its operations. Technological factors -Improvement in coffee making machines influenced the operations of the organisation since its efficiency also improved. Environmental factors -Starbucks partnered with Conservation International’s Center for Environmental Leadership to promote environmentally sustainable best practices in coffee growing methods which are environmental friendly to the planet. The Coffee and Farmer Equity (CAFE), also compelled farmers to comply with good environmental practices. Efforts are made to avoid practices that degrade the ecosystem such as organic cultivation of coffee which does not use pesticides. Legal factors -Starbucks is bound to purchase Fair Trade Certified Coffee and this is a provision meant to promote community coffee growers to benefit from the sale of their products. Fair prices are guaranteed as opposed to other oppressive price regimes which offer low prices to the coffee producers. -The CAFE initiative also guides the operations of Starbucks and this is concerned with fair labour practices, product quality and prices which are within acceptable standards. From the PESTEL analysis carried above, it can be seen that the major threat confronting Starbucks in its business environment is the aspect of negative global economic factors recently witnessed as this impacted on consumer spending. However, there are two major opportunities for Starbucks which include the following: its business approach towards the stakeholders is a plus given that its policies are designed to fulfil their needs and interests. Its expansion strategy is also an opportunity given that coffee business is lucrative given that there are still chances of growth. 2.2 Porter’s five forces model Porter’s five forces model is also going to be used to analyse the external environment for Starbucks. Basically, this is “an outside business strategy tool that is used to make an analysis of how attractive an industry is” (http://www.12manage.com/methods_porter_five_forces.html, N.D). The table below shows the five competitive factors that are likely to affect business at Starbucks. Entry of competitors The coffee industry is not capital intensive hence it is easier for other competitors to penetrate the market easily. Though Starbucks is an established business entity in this particular sector, the aspect of competition cannot be ignored. Threat of substitute There are a variety of substitutes in this particular industry given that there are many players who also offer various similar products. Bargaining Powers Of Buyers The economic crisis has impacted on the buying capabilities of the buyers hence low priced products are likely to attract more customers. Bargaining powers of suppliers -prices are determined under the CAFE regime and it is Starbucks which is responsible for Rivalry among the existing players - Rivalry is a bit intense in this industry since there are many players. Since there low barriers to entry, it seems that more players are likely to penetrate the market which can intensify competition in the industry. This can pose a threat to Starbucks. However, there is an opportunity for the company since it is in control of the prices by the suppliers under the CAFE agreement to offer high prices for products offered. 3.0 Internal analysis This particular section discusses the strengths and weaknesses Starbucks has in its operations. In evaluating the strategic capabilities of the company, the following factors will be discussed in detail as they constitute the internal environment of the company. Strydom (2003) posits to the effect that a key strategy should utilise the strengths of the organisation in order to gain a competitive advantage. These include human, physical and financial resources as they have a direct bearing on the performance of the company. The company’s value chain will also be discussed in this section. 3.1 Starbucks strategic capabilities Since the period Howard Schultz assumed the CEO position of the company in 1987, it can be noted that it has harnessed on a number of strategic capabilities as going to be explained in brief below. 3.1.1 Human The ascendency of Schultz to the position of CEO after acquiring Starbucks in 1987 heralded a new era in the operations of the organisation that characterised its steady growth and development. This can be attributed to his intellectual capability as well as his innovative ideas which significantly contributed towards turning around the fortunes of the company. The employees also have a strong disposition towards the customers and this has significantly contributed towards improved performance of the organisation. Customer care is highly valued which is a major strength for the company. 3.1.2 Physical resources Starbucks is one of the world’s premier roaster and retailer of specialty coffees, with 8,812 company-owned stores and 7,852 licensed stores in more than 50 countries as of April 2010. The exquisite stores are designed in such a way that is meant to retain the elegance that is reflective of the organisation’s commitment to provide quality services to its customers. The company also has huge training and development centers that are strategically meant to foster development of the employees which ultimately leads to growth of the company as a whole. 3.1.3 Financial resources An analysis of financial performance of the company will be carried in detail below. Though the company has been negatively impacted by the global economic crisis, it still enjoys a considerable steady growth of its annual revenues according to its annual statement. However, a closer analysis of the company shows that it possesses various resources that give it a competitive advantage in its operations. For instance, its human resources under the wise leadership of Howard Schultz have significantly contributed to its positive growth and development. It can also be observed that the company has managed to build a reputable brand name through proper utilisation of its resources. 3.2 Value chain According to McCarthy & Perreault, (1996), maintaining value chain for the product is a source of competitive advantage as a result of the uniqueness of the products offered. The company has managed to build a strong brand name under the leadership of Schultz and its value is also added by the marketing strategy employed which is direct interaction with customers. This has resulted in what is termed the halo effect where customers can continue to buy a product after their first experience with it. The stores were also renovated to add value to the brand name of Starbucks and this has also significantly contributed to its improved performance. 3.3 Starbucks financial performance As of April 2010, the company had annual sales of $10 billion. Though its 2008-9 fiscal years were a bit challenging as a result of the global economic crisis, its annual performance from 2005-9 shows that: Revenues rose (company operated stores) in the US: from $ 4.54 to $ 6.6 Billion Revenue rose internationally: from $818.5 Million to $ 1.6 Billion Operating income rose in 2007 and 2008 but fell in 2009 Net earnings peaked at $ 672.6 Million then fell off to $ 315.5 Million It can also be noted that return on equity (ROE) improved from FY 2005 to FY 2007 but then dropped in FY 2008 and FY 2009 due to recession. Besides these setbacks, it can be observed that the company has experienced a steady financial performance. Its balance sheet is strong and there are high chances of operating viably in the long run. In brief, it can be seen that an analysis of Starbucks financial performance shows that it is strong and is capable of improving its competitiveness if the strategic capabilities mentioned above are strengthened. 4.0 Current issues and challenges diagnosis The major strategic challenges facing Starbucks include the following points going to be discussed below. It has been observed that its performance has been affected by poor economic conditions that also impacted negatively on consumer buying behaviour. Some of the products did not go down very well with other consumers’ tastes which resulted in a decline of sales. The other strategic challenge noted is that many coffee shops resembled Italian culture which did not auger well with other consumer’s perceptions. Some of the customers cherished an environment they could sit and enjoy their coffee rather than being served while standing like what was the case in some instances. Another notable challenge that confronted Starbucks in its operations is the aspect of competition. It has been observed that other competitors can freely enter the market which can pose a threat to Starbuck’s viability concerns. There is competition which already exists in the industry and this is a challenge to the organisation. 5.0 Generation of strategic options In order to effectively deal with the challenges highlighted above, certain strategic options can be implemented. A TOWS analysis can be carried out as well as Ansoff matrix since these strategic options are designed to turnaround the fortunes of a company that is experiencing certain challenges in its operations. 5.1 TOWS Matrix This analysis is very important to managers as it allows them to focus on key strategic issues based on the notion that an effective strategy fully utilises the strengths and opportunities of a business and strives to minimise the weaknesses and threats (Lancaster, & Reynolds, 1999). As such, Starbucks should: Harness on the organisation’s reputable brand name while at the same time making concerted efforts to counteract any negative perception that may exist among the customers. The organisation should also leverage on its business approach which is stakeholder oriented. (See appendix 1 for a full TOWS analysis). 5.2 Ansoff’s matrix Ansoff suggests that there are four main ways that can be adopted by a company in order for it to expand and this is dependent on two variables; whether to develop new customers or new products (Kotler, 1999). The four strategic options include market penetration, product development, market expansion, or diversification. Market penetration is a viable strategy for Starbucks if carefully implemented given that it is a strategy that uses the same products to penetrate new markets in order to increase the volume of sales. Indeed, this strategy can be very effective given it would result in an increase in the number of buyers of products offered. Product development seeks to keep the same market of customers but to increase sales to them by offering more developed products. In order to achieve this, there is need to identify the changes in the customers’ tastes and consumption patterns and establish if there is need to develop new products that may satisfy their needs. Market expansion is another strategy that aims to increase market share with the same products in order to get new customers to purchase them. New market segments are created while the product remains the same. Diversification which is often referred to as the suicide strategy in this matrix, attempts to put emphasis diversifying the products in the market (Kotler, 1999). More products should be sold to the customers. 6.0 Evaluation of strategic options Harnessing on the organisation’s reputable brand name is very effective given that the organisation already has a good number of loyal customers hence it is easier to appeal to existing customers than to look for new clients. This strategy is recommended for the company. Whilst market penetration is good, its weakness is that desired products in certain markets may not produce the same effects in other markets. On the other hand, it can be seen that product development is very effective since it is meant to ensure that the customers get satisfactory products every time. Consumers’ tastes change hence products need to be upgraded constantly and this strategy is also recommendable for the organisation as it can revitalise its operations. Market expansion is another very effective strategy that can be implemented by Starbucks as it seeks to increase its market share in different markets. There will be likely chances of attracting new customers by virtue of operating in different markets since there would customers with different tastes. Lastly, diversification is an effective strategy if proper marketing strategies are implemented. For instance, there would be need for conducting market research in order to identify the needs of the interests which can be used as a guide in developing new products. 7.0 Description of the selected strategy A close analysis of the strategies available to Starbucks shows that product development is the most ideal strategy in this particular case. The reason behind this is that customer tastes are constantly changing hence there is need for the company to keep pace with these changes. In order to sustain its operations, the company should be in a position to satisfy the needs of the consumers through the products offered. There is need to conduct market research so as to be able to establish the changing needs of the customers. In order to do this, the resources required include human capital as well as financial resources in order to constantly carry out market research. If properly implemented, the organisation is likely to gain a competitive advantage since it will be ahead of other competitors in terms of offering valued products to the customers. 8.0 Conclusion In as much as the issue of sustainability is concerned, it can be noted that there are certain challenges that can be encountered by Starbucks in implementing the strategies that can revitalise its operations in order to achieve continual growth. Given that it is a large company operating in different geographical locations and the fact that it has a diverse workforce of more than 7000 employees, it may be challenging to train them all so that they can share the same vision of the company. It may be difficult to coordinate their efforts towards the attainment of the set organisational goals hence concerted efforts have to be taken in order to streamline their activities towards the same direction. Training and development will be very important in this particular case but it may be difficult to train people from different locations about the same issue simultaneously. References Ansoff’s Matrix, ND viewed 28 March, 2012 Kotler, P 1999, Kotler on Marketing: How to create, win and dominate Markets, Free Press, London. Lancaster, G & Reynolds, P 1999, Introduction to Marketing: A step by step Guide to all the tools of Marketing, Kogan Page, London. Porter, ME 1985, Competitive Advantage; Creating and Sustaining Superior Performance, The Free Press, New York: NY. Porter’s five forces, 2012, viewed 28 March, 2012 . McCarthy, JE & Perreault, WD 1996, Basic Marketing: A Global Managerial Approach, 12th Edition, Irwin McGraw-Hill, New York: NY. Strydom, J, 2004, Marketing, 3rd Edition, Juta & Co Ltd, CT. Appendix 1 TOWS matrix Opportunities -the market is still growing hence expansion strategy is an opportunity There are chances of growth Threats -competition -economic factors Strengths ­-Good leadership skills of Howard -reputable brand name -customer oriented workforce SO strategies Utilisation of strengths in order to capitalise on the opportunities. This can be done through continual training and development of human capital ST strategies Utilise strengths in order to overcome threats such as competition. Weaknesses -over dependent on imported values WO strategies Utilise opportunities in order to overcome weaknesses WT strategies A defence mechanism has to be implemented in order to minimise threats and weaknesses. Appendix 2 Ansoff’s Matrix Present Products New Markets New Read More