Strategic Analysis: STARBUCKS - Essay Example

? Strategic Analysis: STARBUCKS BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS Introduction............................................................................................................. 2. PESTEL Analysis.................................................................................................... 2.1 Political and economic considerations...................................................... 2.2 Social and technological issues................................................................ 2.3 Legal and environmental issues............................................................... 3. Five Forces Analysis............................................................................................... 4. Critical success factors............................................................................................ 5. The value chain....................................................................................................... 6. Competitive advantage – Threshold versus unique competencies......................... 6.1 Human resource competencies................................................................. 6.2 Stock valuation and market favourability................................................... 7. Ansoff Matrix............................................................................................................ 8. Strategic growth strategies....................................................................................... 9. Market penetration and diversification...................................................................... 10. The corporate brand identity and personality.......................................................... 11. Recommendations................................................................................................... References..................................................................................................................... LIST OF TABLES AND FIGURES Table 1: Opportunities and Threats Emerging from Analysis.................... Table 2: Specific activities contributing to strategic successes................ Figure 1: Model of deliverables in intangible service dimensions............. Figure 2: Table of value exchanges – Branding function............................ Figure 3: A model of value network functions relevant for Starbucks...... Table 3: Financial analysis.............................................................................. Figure 4: Ansoff Matrix and Starbucks position........................................... Strategic Analysis: Starbucks 1. Introduction This report provides a strategic fit analysis of Starbucks, the multi-national coffee house and coffee company based in Seattle, Washington. Currently, Starbucks holds the largest market share in the coffeehouse market, maintaining over 13,000 coffee houses and cafes in the United States. Starbucks has evolved from its earliest business model of providing only premium coffee products in-store to a well-diversified, innovative organisation that now consists of a product line that includes a variety of hot and cold beverages, hot and cold sandwich products, coffee beans, Starbucks-branded ice cream, and merchandising of Starbucks-branded mugs and coffee cups. Diversification of product and service has opened new market opportunities for the company, expanded its revenue-earning capacity, and has served to position the company under premiumization models that justify higher-than-industry-average pricing structures. Brand loyalty was established with Starbucks in key target markets long ago, giving opportunities to use existing brand equity to achieve better marketing-based results. The United States market is a saturated and mature market with many competitors, including McDonald’s, Nestle and Dunkin Donuts. Consumers in the United States have ample opportunities for substitutes, with many competitors offering lower prices to penetrate new markets and, thus, attempting to undercut Starbucks under price positioning in marketing. Price sensitive consumers affected by lingering economic impacts from the 2008 to 2010 recession are significant considerations in this mature market environment when competitors attempt to seize market share from Starbucks. However, the premiumization of Starbucks is still a critical success strategy (branding strategy) that continues to reinforce to consumers that Starbucks is still the first-class leader in coffee expertise. TASK A: ANALYSIS OF STARBUCKS’ EXTERNAL ENVIRONMENT 2. PESTEL Analysis This section describes the political, economic, social, technological, legal and environmental issues affecting Starbucks’ business momentum. 2.1 Political and Economic Considerations Research did not identify any notable political barriers or concerns affecting Starbucks’ strategic market position. The United States maintains a free market economy in which business expansion and development are supported by legislative systems in a democratic, three-tiered government system. Commercial activities maintain limited political influence under capitalistic governmental systems that promote taxation incentives for expansion of operations. The economic climate in the United States is generally favourable for business operations, however lingering impacts of the 2008-2010 recession continues to erode consumer disposable income. The national unemployment rate in the United States is 7.9 percent, with some regions of the country experiencing much higher unemployment that continues to erode economic security in key nation states (Bureau of Labour Statistics 2012). In September of 2012, the consumer price index indicated a 1.1 percent increase in consumer-based commodities, illustrating an unfavourable imbalance between actual consumer prices and gross domestic product (Bureau of Labour Statistics 2012). Additionally, inflation rates in the U.S. have fluctuated on consumer food products, ranging between one percent and 4.5 percent annually. These high inflation rates are also unbalanced between the cost of living increases in salary for U.S. consumers, thus eroding more disposable consumer income that impacts spending in key consumption segments. Imbalanced inflation versus net employment income in consumer households continues to drive consumers to lower-cost beverage models provided by competition such as Dunkin Donuts and McDonalds. 2.2 Social and technological issues The social environment in the United States is complex and diverse. Starbucks maintains mass market appeal, a viable consumption opportunity for consumers ranging from 14 to 80. Consumers in the United States pose risks to business models such as Starbucks as consumption behaviours are often based on psycho-social characteristics that are trends focused. For instance, aspirational reference groups will strongly influence certain target market groups, thereby altering brand preferences. Starbucks must maintain a considerable emphasis on conducting external market research to understand what current trends and attitudes exist in target markets to stay in-line with changing social trends and complexities. In this market, consumers have a considerable volume of buying power where brand defection becomes a critical strategic consideration. The technological environment is diverse and sufficient for supporting multi-dimensional business operations. Wide availability of software support systems, talented and expert labour to support these systems, and asset procurement are favourable for Starbucks. Recently, Starbucks began piloting single-cup coffee machines with a price tag of $11,000 USD each to enhance the service concept at the firm (Schwaner-Albright 2008). The asset supply chain is sufficient to provide premium technologies that are aligned with the company’s premium marketing positioning strategy against competition. 2.3 Legal and Environmental issues Starbucks is consistently facing legal concerns with union organisations. Unions have a powerful influence in the United States at being able to use persuasive integrated communications to rally demand for organisation of internal barista staff. The international union, International Workers of the World, continues to allege numerous labour violations, which provides Starbucks with negative publicity that erodes gains associated with its corporate social responsibility model (IWW 2009; Herbst 2008). Maintaining perceptions of responsibility has, historically, given Starbucks a positive reputation in key consumer target markets. However, ongoing publicity from opposition groups such as the IWW are strategic threats that continue to plague the firm’s ability to establish a positive CSR image. The only notable environmental issue at Starbucks is continuing pressure from eco-friendly stakeholders and legislative powers to develop sustainable business practices related to waste management and utility consumption. Research did not identify any current issues that would significantly impact budget or strategic focus other than the costs of allocating capital resources to sustainable business, which actually benefits the company’s attempt to express a strong focus on corporate social responsibility. 3. Five Forces Analysis Porter (2012) described five external forces that pose risks to a business model. Of these forces, two are significant motivators for corporate strategy development and improvement. First, the level of buying power held by consumers is significant, providing risks of brand switching in a competitive environment where there are many substitute products available. Consumers are able to force backward integration into the Starbucks model, created by price sensitivity that is emerging in a difficult economic environment. Companies such as McDonald’s and Dunkin Donuts continue to attempt premiumization in market positioning, using their high capital resources and revenue gains from associated product lines, to undercut Starbucks’ premium pricing structure. Price competition forces consumption power by consumers in this market. The second force impacting Starbucks significantly is the threat of new entrants. Maintaining a business model that allows an independent cafe owner to model Starbucks’ business concept is not difficult in an environment where business develop is supported by both government and with a substantial banking and lending market available. New entrants continue to open independent cafes, at affordable prices not aligned with a premiumization strategy, seizing market share in important revenue-building environments. Establishing a recognised, localised brand reputation and gaining the small-scale capital requirements necessary to enter this market is relatively simplistic. Starbucks must always be cognizant of the risks of new market entrants attempting to copy Starbucks’ successful model of service and product concept. Starbucks maintains considerable leverage in the supply chain, forcing procurement partners to bargain pricing and distribution methodologies. This is a significant advantage for Starbucks at maintaining cost controls in the supply chain and creating high switching costs for domestic and international procurement partners. Competitive rivalry is also intense, from major competitors and independent cafe owners across the nation. In what might be considered a market under the perfect competition model, promotion and branding are competitive tools that are necessary to gain market attention under psychographic (lifestyle and attitude) segmentation to gain market share. Table 1: Opportunities and Threats Emerging from Analysis Opportunities Establish discounting incentives to gain market interest – affecting price sensitivity Establish barriers to new market entry by competition Threats Cost increases in supply chain Consumer brand defection to lower-cost competitor models 4. Critical Success Factors Table 2: Specific activities contributing to strategic successes Brand Loyalty Starbucks has successfully established a premium and high value model in key target groups Alliances and Acquisitions Co-branding, sponsorships and acquisitions continue to give Starbucks better market position CSR Procurement consists of premium coffee beans from independent, international growers. Community resources enhanced and public image enhanced TASK B: ANALYSIS OF STARBUCKS’ STRATEGIC CAPABILITY 5. The value chain The value network consists of the social and technical resources available to a firm, nodes in the value network are representative of the people and roles affecting operations and strategy, connected by tangible and intangible function. Value networks illustrate inter-dependency between stakeholders, which accounts for the total worth of the company value chain (Johnson et al. 2008). Figure 1: Model of deliverables in intangible service dimensions Source: Allee, V. (2000) Mapping the Value Exchanges, Journal of Business Strategy, 21(4). Figure 2: Table of value exchanges – Branding function Value constructs related to branding strategies in marketing focus Branding is one of the most important conceptions in the value network, as all alliances, internal staffing in relation to cultural development, and establishing premiumisation in key markets are part of the total value network at Starbucks. To establish an effective market position, Starbucks must rely on supply chain partners, internal organisational culture and talent, advertising firms, and retailing partnerships (as only a few examples) to ensure a successful premium branding strategy that differentiates from competition. Revenues are produced from branding success, as well as the provision of knowledge and feedback from important customer segments. It provides tangible value related to loyalty development and a sense of community backed by corporate social responsibility promotions to gain market attention and patronage to a responsible business model. Figure 3: A model of value network functions relevant for Starbucks Source: Allee, V. (2000). As illustrated by Figure 3, the value network consists of distributors, customers, assemblers (baristas), competition and sales occurring over Internet channels. This encompasses areas of distribution, competitive intelligence, the utilisation of strategic knowledge, and product knowledge associated with branding. All relevant actors vital to establishing a positive brand reputation is included in the diagram illustrating the cyclical nature of value network components. 6. Competitive advantage – Threshold versus unique competencies One of the most fundamental advantages for Starbucks is the company’s strong cash position and sales model. Table 3: Financial analysis Revenues 2011 $11 billion Revenue Increase from 2009 to 2011 6.4 % Profit Margin 14.8% Starbucks operates under industry-norm profit margins, sustaining an increase in cash flow of over $1 billion in 2011 (Starbucks 2012). Significant financial advantages are experienced by Starbucks over one such competitor, Dunkin Donuts, with a very high disparity between net income and sales revenues which indicates a costly operational model. 6.1 Human resources competencies Starbucks maintains a very distinct corporate culture that contributes to an effective series of service outcomes; also related to brand strategy. The business utilises a cultural model of human resources that emphasises people-centric service conceptions that translates into expertise and competency with consumer target markets. It is modelled under the model of transformational leadership, in which leaders inspire, motivate, coach and develop whilst also reiterating corporate vision and mission to gain commitment and dedication to meet service imperatives (Fairholm 2009; Scholsberg 2006). 6.2 Stock valuation and market favourability Starbucks’ stock is currently valued at $51.83 per share (Google Finance 2012). Performance of the company’s stock is enhanced through positive shareholder sentiment about business strategy development as well as independent investors (i.e. Moody’s) that continue to support credit worthiness for the firm and long-term investment potential. Advantages in market stability related to Wall Street give Starbucks considerable competitive edge in terms of gaining investor confidence and willingness to seek venture capital investment opportunities where appropriate and relevant. 7. Ansoff Matrix Starbucks is unique from many industries and competitors in this particular industry in terms of diversification and focus on strategic growth. As illustrated by Figure 4, Starbucks touches on all dimensions under this model, supported by new product development, diversification of product line through brand equity establishment, new market development, and market penetration in untapped or low-competition markets. Starbucks fits within the middle of Ansoff’s Matrix, illustrating a company that is establishing a competitive foundation that can thrive in loyal markets and gain ground, through branding focus, in new market environments. Expanding product line to include products not served in-store also give the brand more market presence and illustrates a business model not limited by innovation opportunities. Figure 4: Ansoff Matrix and Starbucks position 8. Strategic growth strategies Starbucks is actively seeking acquisitions to expand its market presence in domestic U.S. markets. In November 2012, Starbucks announced it would be purchasing Teavana, a well-established tea brand. Teavana maintains over 300 mall stores with a respected brand reputation in loyal markets (Starbucks 2012). As illustrated by Ansoff’s Matrix in Figure 4, Starbucks utilises acquisition strategy as a means of gaining market penetration and new market development. The acquisition of Teavana and other recent purchases give Starbucks more market visibility and opportunities to alter the operational model to include product diversification. Expanding into the tea market might, today, be considered a niche market, but under Starbucks’ logo and branding strategies, Teavana and other similar acquisitions is a method of sparing operational cost expenditures by embracing existing facilities and removing capital procurement in the strategic expansion process. Maintaining over 13,000 stores represents significant capital expenditures for facilities management, thus acquisitions streamline these widespread costs that can be allocated to better promotional focus or distribution philosophy for efficiency. It also provides opportunities for creative marketing alliances by combining talent and knowledge in acquired companies to provide more innovative solutions to gain market share and market prominence in this highly-saturated and mature market environment. TASK C: STRATEGIC FIT ANALYSIS 9. Market penetration and diversification Starbucks does not maintain a presence in all U.S. markets and the business is no longer limited by just coffee products and in-store service model development. Even the weakest competitor in this industry, Nestle, still maintains considerable positive brand reputation and loyalty in key markets and high capital resources. Starbucks cannot, unfortunately, tap new markets in the coffee business, but through expansion into non-food and tea markets to give the business an innovative and flexible perception in important target markets. Since the existing markets are saturated by both Starbucks presence and that of major competitors, Starbucks is taking the right strategic avenue when it comes to developing new product and service models and then using acquisitions to enter untapped markets to gain more brand visibility. It is very difficult for companies to recognise when their products or services have reached the decline stage, that is until revenues begin to reflect sudden drops in consumer demand (Komninos 2002). Starbucks is proactive in its branding strategies to recognise what is driving consumer sentiment about the brand personality of Starbucks and then attempting to adjust service and product dimensions to maintain favourable assessment in key target groups. By penetrating new markets and also maintaining focus on new product and service model development, the company removes risk from the market in the event of changes in consumer demand by diversifying brand presence in the country. This should be considered a strategic best practice that could be benchmarked for proactive external market analysis. 10. The corporate brand identity and personality The most fundamental aspect of business success for Starbucks is the level to which consumers believe in the credibility, expertise and competency of the corporate brand. Under the existing premiumization strategies, Starbucks has managed to convince consumers that its products and services are superior and can thus justify higher pricing than competition. Starbucks uses what is referred to as movement marketing in the United States, in which the business tries to build relationship connections with consumers, telling customers what the company values and believes in rather than focusing on product tangibles and benefits (Goodson 2011). One of the most critical strategic dimensions that leads to Starbucks’ successes is the ability to strike a nerve with consumers related to their lifestyles and social attitudes as a means of promoting value through responsible sourcing and premium quality product deliverables. It is not necessarily promotions that serve Starbucks’ market position, it is differentiation strategies that occur using integrated marketing communications that continue to reinforce premium competitive strengths. The company has established a positive brand personality, which will ultimately lead to long-term attachments, that illustrates sincerity, sophistication, excitement and competence. These are three dimensions critical to establishing brand loyalty (Aaker 1996). Starbucks continues to reinforce that its commitment to responsible supply chain sourcing improves communities and consumer lifestyles, giving the brand more credibility and sincerity. These are critical strategic success factors in a competitive environment where branding is a major corporate focus of competition and each attempting to differentiate through focus on certain deliverables and not always focus on pricing differences. As it was established in TASK A that consumers have considerable buying power in this market, branding must be a strategic imperative to maintain premium perceptions in key markets and also diversify as a contingency in the event of diminished brand loyalty or changes in trends-based consumption behaviour in important target markets. 11. Recommendations Research did not uncover any information that would indicate Starbucks is prepared for changes in pricing that is occurring in a rising-cost supply chain or in an environment where dynamic pricing is used by competition to gain price sensitive buyer interest. Even though Starbucks has some leverage in bargaining in the supply chain, costs of coffee procurement have skyrocketed in recent years. Just this year, Arabica beans (premium and high demand coffee commodities) rose to $3 per pound, a sudden increase of .70 cents per pound (Smith 2012). The pre-made coffee products produced by in-house baristas and bulk sales of Starbucks-branded coffee products are already priced higher than industry average, representing a potential threat as it pertains to price sensitive buyers. Because consumers have considerable market influence and power in this market, Starbucks should be evaluating opportunities to reduce prices in the supply chain where appropriate as pricing on products both raw and finished cannot be raised higher without causing brand defection. Starbucks should be looking at opportunities to offset rising commodity prices (either through hedging investments or by changing operations to remove costs). In an environment where Starbucks is having difficulty differentiating between competition that are adopting premiumization models, pricing is a significant strategic concern for business longevity. Starbucks should also be utilising press releases in higher volume to ensure that markets understand its strict focus on corporate social responsibility as an important business construct. Damage is being caused by union influence and ongoing legal problems that impacts brand equity and loyalty in certain markets that make consumption decisions based on responsible business activity. The brand personality as it relates to sincerity can easily be eroded by negative publicity which is a significant strategic threat especially in an environment where competition continues to replicate a proven and profitable business model to achieve more market share. References Aaker, D. (1996). Measuring brand equity across product and markets, California Management Review, 38(Spring), pp.102-119. Allee, V. (2000) Mapping the Value Exchanges, Journal of Business Strategy, 21(4). Bureau of Labour Statistics. (2012). Economy at a Glance. 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Johnson, G., Scholes, K. and Whittington, R. (2008). Exploring Corporate Strategy: Text and Cases, 8th ed. Financial Times Prentice Hall. Komninos, I. (2002). Product life cycle management, Urban and Regional Innovation Research Unit. [online] Available at: http://www.urenio.org/tools/en/Product_Life_Cycle_Management.pdf (accessed 21 November 2012). Porter, M. (2011). Porter’s Five Forces: A model for industry analysis. [online] Available at: http://www.quickmba.com/strategy/porter.shtml (accessed 23 November 2012). Schlosberg, P.B. (2006). Transformational Leadership: A Holistic View of Organizational Change. MagPro Publishing. Schwaner-Albright, O. (2008). Tasting the future of Starbucks coffee from a new machine, New York Times. [online] Available at: http://www.nytimes.com/2008/03/26/dining/26starbucks.html (accessed 22 November 2012). Smith, R. (2012). The bitter truth about why your coffee isn’t tasting as good lately, Daily Finance. [online] Available at: http://www.dailyfinance.com/2012/06/19/noticed-that-your-coffee-tastes-funny-heres-why/ (accessed 22 November 2012). Starbucks. (2012). Starbucks announces agreement to acquire Teavana to globally transform tea industry. [online] Available at: http://news.starbucks.com/ (accessed 20 November 2012). Read More