Innovation Process in Starbucks Corporation - Case Study Example

A CRITICAL ANALYSIS OF THE INNOVATION PROCESS IN STARBUCKS CORPORATION Lecturer Table of Contents 0 Introduction 4 1.1Purpose of Report 4 1.2Innovation and the Innovation Process 4 2.0 Company Profile 5 2.1Types of Innovation in Starbucks 7 2.1.0 Product innovation 8 2.1.1Process innovation 9 2.1.2 Position innovation 9 2.2 Starbucks’ Innovation Strategy 10 2.2.1 Employee involvement 12 2.2.2 Knowledge through Research & Development 13 2.3 Recommendations 14 2.4 Conclusion 14 References 16 List of Figures Figure 1: Generic Model of the Innovation Process.......................................................................5 Figure 2: Starbucks Logo...............................................................................................................6 Figure 3: Porters Generic Strategies of Competition....................................................................10 1.0 Introduction Business enterprises operate in competitive environments that require them to adapt appropriate measures to ensure that they enhance their long-term survival and profitability in their respective industries. As highlighted by Tidd and Bessanet (2009), innovation is a central factor in the long-term profitability of a firm. It is noted that those organizations that can muster knowledge, technological skills and experience to improve their product range and services and how they generate and distribute those services have greater competitive advantage over other companies in their industry. In regard to this, a critical evaluation of how certain organisations drive innovation to maintain competitive advantage will be explored. This report will evaluate innovation within Starbucks Corporation, the leading specialty coffee seller in the world. The author will examine how the corporation took on the innovation challenge by evaluating what Starbucks does, who does it, how well the personnel manage innovation, what the process of innovation involves and how it is shared across parts of the corporation. This will be examined against certain concepts and frameworks established by researchers in this field to provide a sound critical analysis. 1.1 Purpose of Report The report to be conducted will encompass a study that seeks to establish the role of innovation in enhancing the competitive advantage of Starbucks Corporation. In achieving this, the paper will seek to identify the potential benefits accrued from adoption of innovation and the threats facing innovation in such firms. 1.2 Innovation and the Innovation Process Tidd and Bessant (2009) define innovation as “the process of turning opportunity into new ideas and putting these into widely used practice”. According to Trott (2008, p. 15), innovation involves managing all activities that are necessary to the process of creating ideas, technology development, developing and marketing of a novel or improved product or services. Thus, innovation does not just stop with coming up with a new idea, or inventing something, nor creating new market niches. It is a process that takes into account all these factors and integrates them. The challenge in innovation lies in the process it involves. The process revolves essentially around methods of searching for triggers in the internal and external environment for innovation, selecting viable ideas to invest in, implementation and sustaining the innovation into the organization’s policies and structures (Nelson and Winter, 1982, p. 143; Tidd and Bessant, 2009). Tidd and Bessant (2009) suggested a generic model for the innovation process being one that takes place in four stages as shown below. Figure 1: Generic Model of the Innovation Process 2.0 Company Profile Starbucks opened its first store in 1971, owned by Jerry Baldwin, an English teacher, history teacher Zev Siegel and writer Gordon Bowker (Starbucks, 2007). The name and logo of the company (which is a two tailed mermaid, circled by the company’s name) was inspired by a love for the sea (See Figure 1) and Starbucks’ original location at Pike Place Market, Washington (Garza, n.d.). The company initially specialized in quality coffee and teas and became an immediate success, opening branches in other parts of the country. In the early 1980s, Howard Schultz joined the company as marketing executive and after a trip to Italy to get new products, got the innovative idea to bring the café community he witnessed there to the United States, which commenced the Starbucks brand as recognized today. In 1987, Schultz acquired the company rights (Cateora & Graham, 2007, p. 597) and in 1992, the company went public thus establishing the product as a quality merchandize. Since then, Starbucks has seen tremendous growth, growing its brand globally with stores located even in Japan and Singapore. Starbucks believes that “innovation is in their DNA” (Schultz and Gordon, 2011, p. 182) and has introduced various types of innovation during its growth. In an article titled ‘The history of Starbucks’, George Garza (n.d.) demonstrates the innovative ways in which Starbucks maintained its competitive advantage across the years by:- Offering Starbucks coffee on United Airlines flights. Selling premium teas through Starbucks’ own Tazo Tea Company. Using an online platform to give people the option to purchase Starbucks coffee online. Distributing whole bean and ground coffee to supermarkets. Producing premium coffee ice cream with Dreyer’s. Selling CDs in Starbucks retail stores Figure 2: Starbucks Logo Source: Schultz and Gordon (2011, p 9) 2.1Types of Innovation in Starbucks Tidd and Bessant (2009) highlight four types of innovation known as the 4Ps. These are:- Product innovation – this refers to the introduction of a new or greatly improved product or service e.g. in its capabilities or components. Process innovation- this refers to new or improved production processes or distribution and support systems. Position innovation – this refers to significant changes to the way an organization markets its products or services e.g. product placement. Paradigm innovation- this involves shifting of mental frames within which an organization operates. In examining Starbucks, we see that innovation modeled on the 4Ps is evident in this organization. 2.1.0 Product innovation In terms of product innovation, Starbucks has been at the forefront of churning new products and services within the industry. According to Starbucks (2007), the corporation has a diverse product range comprising over 30 blends and original coffees, frappuccino, coffee beans, coffee liquers, line of ice creams, films, music, books, premium chocolate, gift items, Starbucks card, stored value card, coffee accessories and tools. Also, as Starbucks expanded globally, its blended coffees grew to accommodate the region’s unique flavours e.g. “Dulce de Leche Latte” and “Dulce de Leche Frappuccino” from Latin America origins. In this, Starbucks employs the four stages of innovation given by Tidd and Bessant (2009). By looking to their external environment for potential signals of innovation, the company is able to attune to the triggers and create new products that cater to that particular environment. They then allocate resources to bring the product to fruition such as knowledge of how to make it, research and development (R&D) efforts and then it is implemented to encourage adoption in the external and internal environment. Starbucks, through innovative R&D efforts introduced a new product, instant coffee called VIA targeting those customers on the go who want a premium drink. This product is hugely successful for Starbucks. The strategic advantage of Starbucks conducting research into new coffee blends and products for their market is that it gives them strategic advantage over their competitors by offering something that no one else can, at least not in the way that Starbucks does it (Starbucks Corporation, 2008). However, despite the broad range of innovative products that Starbucks offers, there are those products that were introduced but failed to take off. Examples of these are “Joe” magazine, introduced in 1999 but only lasted for three issues and an internet venture in the same year for selling kitchen products (Serwer, 2004, pp.4-5). Coffee products that also failed were Sorbetto and Mazagran (Bloomberg Businessweek, May 2011). These failures arose because of poor market analysis and it enabled the corporation to learn from the experiences on how to manage innovation better. 2.1.1Process innovation A unique aspect of Starbucks’ product creation is its focus on geography to create new products. Helm (2007, p.2) points out that Starbucks uses a systematic process called “Geography is a flavour” that is distinguished by the creating of new products based on the different cultural and environmental demands worldwide. In order to save on service time, Starbuck’s introduced a few changes to its delivery process. For one, it did away with credit card signatures on purchases below $25. In stores, it created new positions that enabled employees to ‘float’ to where urgent service was needed in as short a time as possible (Gary, April 12 2005). For the longest time, Starbucks neglected its focus on process innovation to focus on growth and entering new markets globally. This proved costly for the company since even though they were still innovative, albeit in other approaches, their lack of dedication to process innovation resulted in drastic cost-reductive measures in 2008. The management of the company was too focused on opening stores across the country and globe, that issues such as technological adoption and supply-chain discipline were ignored, which left the company vulnerable to market threats and it experienced heavy losses with the 2007/2008 years. This failure was an opportunity for the organization to realize that during growth, it is important to also innovate in the operations areas too. 2.1.2 Position innovation Originally, Starbucks did not sell beverages, but whole-bean and ground coffee. When Schultz joined the team, and got an idea to bring the café environment he witnessed during a business trip in Italy to the States and succeeded, that was position innovation. This has proved to be very strategic for Starbucks as its emphasis lay in creating a relaxed atmosphere where people can take a breather, between the office and home. Even the ambience at most Starbucks store is purposely arranged in a manner to facilitate the relaxed atmosphere. Tables are spaced apart appropriately to allow private conversations, and they deliberately use round tables because research shows that customers are more at ease at round tables (Krauss, 2005, p.19). This customer-centric approach is emphasized by a statement made by Schultz in Fortune Magazine (Vol 149, No. 2): “We aren’t in the coffee business, serving people. We are in the people business, serving coffee”. Starbucks introduced innovative ways to the distribution methods, outside the regular retail outlet channels e.g. bringing coffee to customers of Hyatt. Also, it introduced reward programs such as My Starbucks Rewards Card that built on already established models in other organizations. 2.2 Starbucks’ Innovation Strategy In order to gain competitive advantage, an organisation should analyse its competitive environment. Porter’s three generic strategies of overall cost leadership, differentiation and focus; are the best that an organisation can use to analyse the competitive advantage (Porter, 1998, p.38). Firms must first analyse the competitive environment before making a strategic decision on how to attain competitive advantage (Ritson, 2011, p.48), Figure 3: Porters Generic Strategies of Competition Source: International Journal of Business and Management (2012) In the broader differentiation aspect, Starbucks’ strategy has been to provide premium coffee and a unique store experience in various locations. The company’s newest product -instant coffee VIA- offers both differentiation and low cost leadership in the general industry market. This is because; it is a unique Starbucks product that offers a convenient alternative to Starbucks’ premium drinks for those customers who want fast service. In this, Starbucks practised discontinuous innovation (Tidd and Bessant, 2009). When it comes to focused differentiation, Starbucks has a range of in-store gifts and brewing accessories to target the coffee lover, which are only found in their stores. It is evident from Porter’s generic strategies of competitive advantage that Starbucks’ area of concentration lies in the differentiation strategy which drives its innovation efforts mainly to product innovation. Over the years, the company has introduced new products, from new flavours of blended coffees to carving a niche in the entertainment industry with their CDs. This dedicated focus on only one area of innovation cost the company dearly in the last few years, as they failed to innovate in other more strategic areas such as technology adoption. One of the key strengths of Starbucks is in its strong financial holdings that enable it to finance product innovation, but a gap may be found in its stages of the innovation process, particularly searching and selecting ideas. Evidence suggests that in this organization, innovative initiatives were rolled out before thorough analysis was conducted, suggesting product initiatives was more emotion than analysis (Bloomberg Businessweek, April 25 – Mar, 2011). This saw a number of product failures in the company. Starbucks is essentially an innovative corporation (Company Timeline, 2008). Its innovative strategy is driven by the company’s need to be the leading producer in its market. Starbucks has gone out of its way to make innovation part of its work culture. The management of the corporation manage innovation in the following ways:- 2.2.1 Employee involvement Starbucks has invested significantly to build a work culture that has aided its success. Employee involvement in Starbucks has facilitated its competitive advantage. There are various measures that the company has placed to make its employees feel valued. In stores, there are signs that read “We’re known for our coffee, but our people make us famous”. Employees are called ‘partners’ (Serwer, 2004, p.14) and through various avenues, are allowed to offer their opinions. Internal promotions are highly encouraged, and training is given to employees who qualify for higher positions. Employees are provided with healthcare, medical, dental and optical benefits and also stock options (Starbucks, 2007). All employees undergo learning and training in the Starbucks Coffee School to learn about coffee history and knowledge, drink preparation, customer service and retail skills. Managers also learn on store operations, company practices and procedure, information systems and people management (Helm, 2007, p. 2). Employees are empowered to make decisions and are involved in the daily decision making of the firm. Such engagement between the management and the employees results in motivation and provides a good working environment which attracts customers (Harter, Schmidt & Theodore, 2012). This also facilitates innovation as employees make suggestions towards improvements. For instance, in 1989 an employee proposed use of non-fat milk after customer requests and despite initial reluctance, the management team implemented the new change (Auch-Roy-Pen, 2004, p.9) 2.2.2 Knowledge through Research & Development The mission statement of Starbucks is that it is “as the premier purveyor of the finest coffee in the world while maintaining [its] uncompromising principles while it grows” (Starbucks, 2007). In order to be the best, the company ought to have deep knowledge and understanding of the complete supply chain for its product, coffee which has contributed to its success. From its early development years, the CEO of Starbucks, Howard Schultz took a deep interest in learning about the craft involved in growing coffee. This has contributed to the organisation’s strength because complete understanding of the product, the supply chain and production process has aided in enhancing quality control even with new products. Starbucks has invested in innovative R&D efforts, including sophisticated IT information systems in order to establish itself as the “coffee authority”. Its dominance in the industry lies in its in-depth knowledge and control over the roasting process developed by trial and taste methods incorporating ‘roast curves’ to come up with unique blends of coffee beans (Schultz and Gordon, 2011, p. 245). This knowledge is build on from previous knowledge as the company has a learning culture that passes knowledge from generation to generation. 2.3 Recommendations Starbucks has managed to maintain its competitive advantage in its industry by being a leading innovative corporation. Its focus on R&D to drive knowledge and product innovation within the company has been one of its greatest strengths. However, the single focus on growth and new products has caused it to neglect other areas of innovation at a cost. One way to avoid losing out on the advantages of an integrated innovation is if the corporation reduced its portfolio to focus mainly on its core product, premium coffee, from which it generates most of its revenue (Starbucks Corporation, 2008). This lies in the company enhancing its brand and customer interactivity in order to build and reinforce loyalty, rather than in creating new products. This will enhance its differentiation strategy and avoid it losing its market share to competitors and new entrants such as McDonalds McCafé (Burritt, 2007). Additionally, Starbucks should consider more economic pricing for its customers. In view of economic downturns, most people reconsider their spending habits and since Starbucks targets a particular customer base, having a cost-friendly option will have more people stop in their stores. 2.4 Conclusion This report aimed at examining the process of innovation in Starbucks. By using models and approaches proposed in various research studies, how and what innovations this corporation practiced were detailed. Innovation takes places in 4 major forms i.e. product innovation, process innovation, position innovation and paradigm innovation (Tidd and Bessant, 2009). In Starbucks, its competitive strategy of differentiation has seen the company invest mostly in product innovation, although other innovative approaches have been used. The work culture of Starbucks which lays emphasis on its human capital and innovation contributed greatly to its market dominance and success. References Auch-Roy-Pen H. (2004).The Starbucks Corporation: Past, Present and Future. 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