Strategic Fit Analysis of Starbucks The United States Segment - Assignment Example

? Strategic Fit Analysis of Starbucks – The United s Segment goes here Professional Specialization of your Table of Contents List of Tables 3 1.Introduction 4 2. Task A 5 2.1 PESTEL Analysis 5 2.1.1 Macro Economic Factors 6 2.1.2 Political Factors 7 2.1.3 Legal Factors 7 2.1.4 Technological Factors 8 2.1.5 Environmental Factors 8 2.2 Porter’s Five Forces Model 8 2.2.1 Threat of New Entrants 9 2.2.2 Bargaining Power of Buyer 9 2.2.3 Bargaining Power of Supplier 10 2.2.4 Threat of Substitute 10 2.2.5 Competitive Rivalry 10 2.3 Critical Success Factors 10 3.TASK B - Starbucks Strategic Analysis 12 3.1 Resources 12 3.2 Capabilities 12 3.3 Competencies 13 3.4 Value Chain Analysis 13 4. Task C : Strategic Fit Analysis 14 Appendix A 16 Appendix B 19 References 21 List of Tables Table Page # Table of PESTEL Factors’ Impacts 6 Coffee Price Index 10 Appendix A 16 Appendix B 19 1. Introduction This report will work out a strategic fit for Starbucks United States (US) segment. Starbucks is a renowned name in high quality coffee and several other products primarily related to coffee and tea business worldwide. Additionally, Starbucks own the biggest coffee store chain in US. The Company holds a handsome share of Coffee market and has displayed a healthy growth rate since its existence. Starbucks was established in 1971 with a basic setup of roasted coffee bean which has now grown into a multinational enterprise business with large scale operations in coffee and allied fields of interest. The company website explains its range of business operations in the following terms, “Starbucks purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a variety of complementary food items, a selection of premium teas, and beverage-related accessories and equipment.” (Starbucks, 2012). The steady march of success by Starbucks is reflected in its continuous growth through several past years except for the year 2009 where we witness a little dip in net revenues. The chairman, President and Chief Executive Officer rightly declares this success, “On almost every level, fiscal 2011 was a remarkable year for Starbucks. Our global business delivered the highest levels of service to our customers, a truly rewarding experience to our partners (employees), and a record-level performance to shareholders.” (Schultz, 2011). The Starbucks business strategy seeks to address sustainability, maintainability, and growth issues through effective management of available resources while assessing risks, opportunities and threats to ensure a sustainable growth while keeping the company’s value plan intact. The ultimate objective of business strategy is not only to earn good profits but also to win the customer satisfaction and confidence of shareholders and workforce. The Company’s Proxy statement for the year 2012 outlines some of these strategic guidelines in these words, “The involvement of the board of directors in reviewing Starbucks business strategy is an integral aspect of the board’s assessment of management’s tolerance for risk and also its determination of what constitutes an appropriate level of risk for the Company.” (Proxy, 2012). The purpose of the report is to establish a best strategic fit of Starbucks to further strengthen its position and share in the US coffee market. Before finding a best strategic fit for a growing company like Starbucks, it is imperative to explore various internal strengths and weaknesses of company as well as external opportunities and threats that it may face in the regional competitive market. Starbucks has a strategic insight into the growing market of coffee in United States. Ganes-Chase (2012) has explained the reasons towards changing coffee consumption trends for US in a more meaningful manner “Cof­fee has had con­sid­er­able pos­i­tive media cov­er­age about stud­ies find­ing drink­ing cof­fee to be good for your health.” This offers a lot of promise and energy to a coffee giant like Starbucks. 2. Task A Businesses are not operated in isolation they effects and got effected by Macro and Micro economic factors and forces. A successful business needs to identify the best strategic fit for its products while handling these factors and forces for the sustainability and growth of the business. Starbucks requires a carefully designed strategy to overcome various forces that may have an adverse impact on the business while cashing on the opportunities. The forth coming sections will outline various threats and opportunities posed by the multifaceted macro and micro forces; 2.1 PESTEL Analysis PESTEL Analysis is an effective macro-environment analytical tool. It may include the investigation of several factors that may effect the business operation of Starbucks in US to help in the decision making process of the business. This analysis will focus economic, political, legal and technological factors. These factors are discussed in detail at Appendix A to this report while each factor is evaluated on fixed scale provided below; Impact Value No Impact 0 Low 1 Medium 2 High 3 Very High 4 Maximum 5 Table of Impact A short evaluation of each factor is provided below; 2.1.1 Macro Economic Factors Interest Rates Interest rates are very crucial for sustainable business operation. Even smaller variations may cause to record very high fluctuations in consumer prices and Starbucks revenues. Exchange Rates A stable and high rate of dollar will leave a positive effect on the Starbucks coffee business. Starbucks import high quality coffee from grower countries where exchange rates for dollar will have a direct impact on the raw material purchases and the same will result in lower consumer prices. Globalization Globalization has helped Starbucks to extend its purchase circle to a number of countries where business can realize higher revenues in terms of raw material purchases. 2.1.2 Political Factors Taxation The governmental decisions on taxation have a direct and immediate impact on business sector. Starbuck requires to keep a close eye on this factor along its supply chains because a higher tax rate on agricultural sector in grower country will cause a rise of consumer prices in United States. Security Issues After 9/11, the inbound trafficking of goods and raw materials has experienced a tougher environment due to legitimate security concerns. In some cases it results in delays and in some cases can chain link may completely fadeout. 2.1.3 Legal Factors Labour / Employment Laws Local and foreign labour laws amendments may cause to impact the cost of production. This may include increased cost of living, taxation, insurance etc. expenses for local and foreign employees. Food Safety Legislation Food and Drug Association (FDA) regulations may also cause an increase in the cost of production as a result of which Starbucks may have to face difficulties in offering competitive consumer prices in local and foreign markets. This is especially applicable to Starbucks’ ready to brew brands. 2.1.4 Technological Factors Technology for Profit Starbuck is supposed to be responsive to technological advancement in order to keep its business operations at a pace that reflects contemporary trends. This may help in decreasing the cost of production and rise of revenues. 2.1.5 Environmental Factors Environment Sensitive Products and Supplies Coffee is an environment sensitive product. Cultures, environment and seasons are required to be effectively managed and watched. Following is a graphical representation of these factors’ impact on Starbucks business operations. The graph provides crucial insights into the various macro economic factors as whole. It lends a useful decision support for higher management to determine the level of focus and direction of future actions for each factor. 2.2 Porter’s Five Forces Model The Porter’s five forces framework is used to analyze the competitive advantage or disadvantage of Starbucks in it US segment of business. The purpose of the analysis is to identify various factors that may affect performance and profitability of Starbucks. The factors analyzed include threat of new entrants, bargaining power of buyers, threat of substitute, bargaining power of suppliers and competitive rivalry. (Hill & Gareth, 2007, 45). Following is a short description of these factors and detailed analysis is provided at the Appendix B. 2.2.1 Threat of New Entrants Starbucks faces a lower level of threat as far as new entrances are concerned. Any competitor will be required to make huge sums of investment in product and stores infrastructure through out USA to pose a reasonable challenge of competency. Secondly, it will be very difficult to engage loyal customer of Starbuck to some other newly introduced brands. 2.2.2 Bargaining Power of Buyer Likelihood of brands to compete the Starbucks quality products is quite weak if we examine past efforts in this connection. Starbucks has successfully retained it customer which in turn render less bargaining power to customers. The continuous rise in price index of coffee (Price Index, 2012) suggests that the buyers do not have much bargaining powers. Price index of coffee 2.2.3 Bargaining Power of Supplier There are fewer bound on entry in coffee supply chain. Starbucks has a variety of supply chain option. The company has also started Supplier Diversity Program to encourage less privileged supplier communities. (Starbucks, 2012) 2.2.4 Threat of Substitute Tea and other beverages may server as mild substitutes. The continuous increase in coffee consumption however denies any real threat of substitute. (Consumption Stats, 2010) 2.2.5 Competitive Rivalry Starbucks is almost immune to a real tough competition. McDonalds and Dunkin Donuts have shown some strength but these companies still have long way to go. 2.3 Critical Success Factors The analysis of macro and micro economic environment for Starbucks has resulted in the following Critical Success Factors. The objective of these CSF point is to ensure the growth and sustainability of Starbucks. The major areas identified through the PESTEL and Porter’s Modal provide an important insight into economic, social and geo political factor that may leverage the optimal attainment of the objectives set by the higher management. The identified CSF points for Starbucks US Segment are presented below; CSF Applicability in Starbucks US Segment Economic CSF In case of high interest rates the management will require to ensure a cut in production expenses through new more efficient means of supplies at lower rates without incurring any damage on reliability of supplies. Through better utilization of globalization factor to ensure a cost effective production at US segment. Identifying new channels for supplies. Security CSF While security remains a core national objective Starbucks require more renowned and reliable business partners for supply and marketing. Food Safety CSF The human health factor is the most common and important concern for marketing food and beverages. Starbucks requires to ensure the standards set by the higher management a quality assurance departments are strictly followed throughout the organization. Product loyalty CSF Starbucks enjoys a very healthy goodwill which is required to be translated into more concrete display of customer loyalty with the product. New schemes and terms of action can make a valuable contribution towards higher returns. Technology CSF The widespread use of Internet and other communication channels has raised serious challenges for every business and Starbucks is no exception. Starbucks is already projecting its products and provisions in wholly owned licensed store through internet and other cutting edge communication technologies, now is the time to take a lead in through the employment of ICT services for personalized marketing strategies. 3. TASK B - Starbucks Strategic Analysis 3.1 Resources Resources are the core assets of an organization. These may include human and material resources like employees, buildings, stores, stocks. These physical resources are also known a the tangible resources. The other types of resources include goodwill, acceptance, product loyalty, corporate values, norms and culture. These intangible resources are equally important and can make a mark difference, how the company performs in critically adverse environments. Starbuck has a gigantic list of these tangible and intangible resources. The countrywide network of its Stores is the major contributor towards reset of the corporate operations. Starbucks has succeeded in exercising vitally important control over its resources. 3.2 Capabilities The ability of optimal use of a resource is known as the capability. Starbucks capability is established and displayed in various challenges that company has faced and throughout its historic corridor of successes. The early footprint of the corporate culture for success shows the strength of capabilities that Starbucks has displayed over the period of its existence. 3.3 Competencies Competency is the ability of an organization to minimize the potential disadvantages of the company while maximizing the advantages. Above all, the competencies of a corporate group like Starbucks are surfaced in the handling of the diversity that a growing company may have to face along with the consist quality of the product. Starbucks has been growing leaps and bounds in the last decade and has successfully met the challenges of a changed business environment with the boost of technological advancements in supplies channels, production procedure and the introduction of innovative idea in the product and complimentary conveniences that can make difference. The concept of a “third place to work and relax” is the continuation of innovative ideas that show the competence of Starbucks in maintaining its values and versatility among other competitors. 3.4 Value Chain Analysis Business operations of a company can be categorized in primary and secondary (supportive) operations. The primary operations are concerned with the goals of production, marketing, distribution, sales, and services whereas the secondary operations are supposed to add value to primary operations in way or other. Following is a short analysis how Starbucks is managing it value chain. Production is the primary objective of the business maintenance, all other operations supports this objective in some manner. Starbucks ensure best practices are followed at its production plants where a variety of operations in production phase are followed. Starbucks values the quality very high and no compromises are affordable in this dimension. The purpose of these operations is to ensure that production activities are conducted on desired pace and without any interference of internal or external obstacles. In primary activities of distribution, sales and services the top most priority is the customer convenience and affordability. Every possible resource is employed and applied to achieve this primary objective. Similarly, the marketing operations are of core importance for a business like Starbucks. The company is spending considerable sums on marketing the product and various brands that are introduced time to time in order to engage various segments of the US society. Personal marketing explores multiple ways the customers can be contacted on one to one bases. This not only ensures increased sense of ownership but also reflects in higher sales graphs. The most important of support activity for Starbucks is the continuous supply of raw coffee bean. The activity is carried out by a vast range of suppliers that are renowned for their quality services and timely deliveries. Starbucks has to keep a close liaison with suppliers in order to ensure they get the best at a very competitive price so that the effect may be transferred to end users of the coffee products. Secondly, Starbucks is employing cutting edge technologies not only in production environments but also in marketing, distribution and services sector. Most of the Starbucks store in USA offer wireless broadband internet services free of cost within the premises of their stores. Technology is also helping Starbucks in attracting new customer through online marketing strategies and getting firsthand quick feedbacks from their clientele. 4. Task C : Strategic Fit Analysis Strategic Fit Analysis is a widely used analytical tool to deduce the perfect mix of various strengths and opportunities while averting possible weaknesses and threat that a business may be facing. The results obtained from the PESTEL analysis and Porters five forces modal can provide a useful insight while analysing the internal weakness and strengths as well external opportunities and threat in the economic and business environment. Following is a short analysis of these four SWOT factor for the Starbucks US Segment. Strengths Weaknesses Wide range of wholly owned and licensed Starbucks stores network Huge and diverse product line Huge and reliable supply chain Edge in infrastructural and technological implementation. Brands loyalty Goodwill among masses Popularity of various brands and quality services in stores. Social response Luxury brands may introduce barrier for loyal customers in lower income groups. High maintenance costs of stores with a concept of “a place to work and relax.” Higher level of dependence on foreign growers for the products marketed in USA Social, economic and legislative issues in grower countries. Lower level of competitors Opportunities Threats Globalization has opened new reachable markets both for raw coffee purchases and selling Starbucks popular products Exceptional growth opportunities in Europe, Asia Pacific and African countries. Lot of Tax free corridors for Trade and commerce in new countries. Higher dependencies on third parties and global partners. No control over local legislation and regulations Higher dependency on technology Huge segments of lower income and middle income groups in target markets. Adaptation to foreign customs and culture, Appendix A Macro Economic Factors Factor Comments Impact Interest Rates Present financial cliff may result in higher interest rates. Higher interest rates will affect supplies and purchases negatively. Decreased consumption and sales. 4 Exchange Rates Recent devaluation of currencies in a number of supplier countries will have positive impact on Starbucks profit because of increased dollar value. This may also reflect in better consumer value at decreased rates. 4 Globalization Recent increase in trends of global purchases from relatively more cost effective countries will result in increased profits But it will also discourage local production of coffee. 3 Political Factors Factor Comments Impact Taxation Rates Present financial cliff may result in higher Taxes. Taxation on agriculture sector in coffee growing regions will result in higher coffee prices for consumers. 5 Security Issues In the aftermath of 9/11 the governmental agencies have imposed increase security layers for foreign suppliers. This may discourage international Trade. Increased reliance on local grower will result in higher cost of purchase. 3 Legal Factors Factor Comments Impact Labour / Employment Laws On going legislation efforts in various US States may result in strict laws for employment and labours. “Doing business in California will soon require proactive posts affirming efforts to eliminate forced labor in product supply chains.” (NCA, 2011) Taxation on agriculture sector in coffee growing regions will result in higher coffee prices for consumers. 2 Food Safety Legislation “The first major revamp of federal food safety laws since the 1930s, the Act (FSMA) grants new powers to the Food and Drug Administration (FDA) and imposes added responsibilities for food safety throughout the supply chain.” (NCA, 2011) Food safety sureties required by FDA’s may result in increased cost of production. 3 Technological Factors Factor Comments Impact Technology for Profit Technology may help to reduce labour, production, supply chain costs and may help to compete in a price sensitive market. 3 Environmental Factors Factor Comments Impact Environment Sensitive Products and Supplies Coffee is an environment sensitive product and its supplies are closely attached to local environment and culture. Start of Starbucks business operations in a specific region for sales or purchases requires detailed environment analysis. 3 Appendix B Threat of new Entrants Factor Comments Impact High capital requirements Revenue gaps between Starbucks, Yum! Brands and McDonalds shows there are only fewer chances of new entrants. Revenue table of top three competitors show wide gaps between Starbucks and rest of the competitors. (Wall St. 2012) 1 Brand Loyalty Customers like to stick to one brand of their choice and there are only fewer chances of frequent changes in chosen brand. Loyalty cards are issued to retain customers and to further consolidate the customer segregation. 1 Bargaining Power of Buyer Factor Comments Impact Only fewer alternative are available There are only fewer alternatives available to buyer and most out of the available they have already tasted out. The continuous rise in price index of coffee (Price Index, 2012) suggests that the buyers do not have much bargaining powers. 1 Bargaining Power of Supplier Factor Comments Impact No bound on entry as supplier There are fewer bound on entry in coffee supply chain. The Starbucks has a variety of supply chain option. The Starbucks has also started Supplier Diversity Program to encourage less privileged supplier communities. (Starbucks, 2012) 1 Threat of Substitute Factor Comments Impact Substitutes are less likely to come into play. Tea and other beverages may work as a substitute but buyer will adopt these instead of coffee if they have less buying power. The continuous increase in coffee consumption in last decade suggests these substitute do not have much relevance under these circumstances. (Consumption Stats, 2010) 1 Competitive Rivalry Factor Comments Impact Starbucks enjoys very safe competition Starbucks store provide a concept of “Third place to work and relax” which is almost immune to any competition and getting more popular with masses. McDonalds and Dunkin Donuts have some strength but the basic modal of their stores differs and restricts there competitive capability. 3 References Starbucks 2012, What we are all about: Starbucks Investor Relations, viewed 06 December, 2012, Proxy 2012, Starbucks Proxy Statement, viewed 06 December, 2011, Schultz, Howard 2011, Annual Report 2011, viewed 06 December, 2011, Statistics Brain 2012, Coffee Drinking Statistics for US, viewed 09 December, 2012, < http://www.statisticbrain.com/coffee-drinking-statistics > Ganes-Chase 2012, Coffee Consumption in USA, viewed 09 December, 2012, < http://magazine.coffeetalk.com/articles/may10-consumption/ > NCA 2011, Legislative News, National Coffee Association USA, viewed 09 December, 2012, < http://www.ncausa.org/i4a/pages/index.cfm?pageid=779 > Hill, Charles W. L., Gareth R. Jones 2007, Strategic Management: An Integrated Approach, 8th eds, Cengage Learning, USA. Wall St. 2012, Competition in the Coffee Industry is Heating Up, Wall Street Cheat Sheet, viewed 09 December, 2012, < http://wallstcheatsheet.com/trading-markets/competition-in-the-coffee-industry-is-heating-up.html/> Read More