Strategic Position of Starbucks - Case Study Example

Strategic Position of Starbucks Table of Contents Strategic Position of Starbucks 1 Porter’s Generic Strategies 2 Bowman’s Strategy Clock 3 Perceptual Mapping 5 Key external drivers and its effect on Starbucks 7 Adding Value to the Current Strategic Position 10 Conclusion and Sustainability of Starbucks 13 Reference 14 Introduction Starbuck is a US based coffee chain company. It operates in more than sixty countries with a total of more than more than 20,500 stores worldwide. The company was established in 1971 in Seattle.Starbucks stores offer coffee beverages, cakes and bakery products. Starbucks is best known for their service and in house ambience (Starbucks, 2014). As of 2014 the company has made revenue of $14.89 billion which is a 12% hike over the previous year. Starbucks product line is priced at a premium range and is targeted at the niche customers (Fortune, 2014). This paper is focused on the strategic positioning of Starbucks and how it has strengthened its position in the industry. It also includes the effect of the external market drivers on the organization and how the company has designed it marketing strategy to ensure its long term sustainability. Strategic Position of Starbucks Starbucks’ core competency is based on its premium positioning of its product line. The company focuses on delivering high quality coffee beverages and snacks which includes cakes and other bakery products. Thus the company not only focuses on providing a good quality product but it also focuses on providing a unique experience to the customers. Offering a unique experience ensure the customers’ return. Starbuck’s competencies also include establishing a strong and close relationship with its suppliers. This as a result has helped the company to make overseas expansion and make certain strategic acquisitions. Porter’s Generic Strategies The Porters generic strategy shows how the company has devised its marketing strategy in order to stay ahead of its competition. The parent brand Starbucks, is positioned in the ‘Differentiation Strategy’ because it offers high quality specialty coffee products along with a unique experience of the store’s ambience (Pretorius, 2008). This differentiating factor distinguishes the company from its rivals. The newly introduced brand by Starbuck called VIA offers instant coffee to the customers. Thus VIA is categorized under the Cost leadership and Differentiation category (Lee, 2012). Even though VIA acts as a low cost alternative of premium Starbucks coffee, it still differentiates itself from its rivals owing to the brand valuation of the company. The company also offers gifts and brewing items, which falls under the focussed differentiation category, because these products are aimed towards the genuine coffee lovers (Lee, 2012). Figure 1: Porter’s Generic Strategy Lower cost Differentiation Broad target Cost Leadership (VIA) Differentiation (Starbucks) (VIA) Narrow target Cost focus Focused Differentiation (Brewing machines and gifts) Source: (Lee, 2012) Bowman’s Strategy Clock The likelihood of success of a firm can be assessed by the Bowman’s strategy clock. According to Faulkner and Bowman (1995) this model assesses a company’s current position and direction of progress based on eight categories. Different firms belong to different categories, depending on their perceived value and price. Figure 1: Bowman’s Strategy Clock Source: (Created by Author) The Bowman’s strategy clock suggests that Starbucks falls under the category of Focused differentiation. This category is characterized by high price and high perceived value. Starbucks charge premium price for high quality coffee, unique ambience and customer experience. The high perceived value allows the company to build a strong brand awareness which acts as a competitive advantage for the company. The rival brands of Starbucks like Café Nero and Dunkin Donuts fall under Differentiation and Hybrid category. Café Nero has medium perceived value offered at a medium price, thus it follows a ‘differentiation’ approach. On the other hand Dunkin Donuts falls under the ‘hybrid’ category, which is characterized fair perceived quality at a lower price. Although Dunkin Donuts does not offer unique in-store experiences like Starbucks but it has captured consumer preference by product quality and competitive pricing (MarketLine, 2014). Perceptual Mapping Figure 2: Perceptual map showing the relative position of Starbucks Source: (Created by Author) The perceptual map shown above highlights the relative position of Starbucks based on two parameters, product quality and price. The graph suggests that Starbucks offers high product and service quality at a higher price than its competitors. The high product and service quality has allowed the company to enjoy the leadership position in the market. Figure 3: Perceptual map showing the relative position of Starbucks Source: (Created by Author) The graph shown above suggests that the company has incorporated an appealing aesthetics which offers the customers a unique ‘Starbucks experience’, thereby gaining higher preference from the niche customers. However, the figures also suggest that the Starbucks’ pricing is higher than its competitors, as a result the value proposition of Starbucks does not appeal to budget conscious customers. The rival companies like Café Nero, Costa, McDonalds, etc offer fair quality products at a lower price to attract the mass market, thereby gaining a larger consumer base. Key external drivers and its effect on Starbucks The external drivers put a significant effect in the business operations of a company. This section discusses the external drivers and its affect the business of Starbucks by using PESTLE analysis. Political influence: The procurement of raw materials which are green coffee beans needs to be imported from tropical countries, as coffee plants only grow in certain climatic condition. Hence, the international trade relationship is crucial for company’s business (Crowe, 2010). Economic factors: The currency exchange rate and overseas business regulations affects the outsourcing of coffee from African countries. Fluctuation of currency values makes it unpredictable for the company to measure its financials of the overseas business operations (Larson, 2008). The higher affordability of the customers in the developed countries is compatible with the premium pricing of Starbucks’ products, but among the developing countries, where the affordability is comparatively low the high pricing poses as a barrier to consumer preference. Crowe (2010) believes consumption of specialty coffee should be deemed as luxury. Due to which, during the economic downturn in 2007, the American consumers switched to low cost alternativeslike cheap coffee houses or homemade coffee (Isidore, 2008). Thus the disposable income is a primary determinant of the demand driver in the specialty coffee industry. Social factors: The level of consumption of coffee is dependent on the social culture of a region. The reports of ICO (2014) suggested that the consumption of coffee over the years has increased drastically. Moreover, according to their report the preference of cafe and the trends of social hangout in a coffee house have also increased. In developing countries like India, where tea was the primary choice of beverage, the consumption of coffee and preference of cafes have also increased in the past decade (BusinessLine, 2014). Thus the overall growing trend of coffee consumption is favourable for the company’s growth and sustainability. Technological factors: Technology has always played a pivotal role in the business operations of Starbucks. The operations process of a cafe is highly labour intensive, however Starbucks has employed latest brewing and espresso machines to improve their quality and reduce the human labour requirement. The company uses its trademark Mastrena espresso equipment to brew every coffee shot after it has been ordered. This provides an opportunity for the company to sustain a higher consistency level of product quality. Thus it can be stated that Starbucks has successfully utilized the technological advancement in order to add value for the customers and improve its business operations (Crowe, 2010). Environmental factors: According to the reports of ICO (2014) the consumption of coffee is more prevalent in cold countries. In countries like Denmark, Netherlands, Finland, Norway, etc. the consumption of coffee is quite high (Crisil, 2010). Thus Starbuck has high opportunity in expanding its business operations in these regions. Legal factors: The legal framework of a region acts as a controlling factor of a business operation. In 2013, a law suit was filed against Starbucks, where the federal court mentioned that the company has violated the American Disabilities Act. It was suspected that Starbuck’s pickup counter was too high for disabled people. Although the issue was raised in 2005, but the company ignored it deliberately and kept the heights of the counters unchanged (Karmasek, 2013). The legal framework may pose certain problems in the business operations of a firm, but it also helps the company against illegal copyright or patent infringements. In Los Angeles, a company established a cafe named “Dumb Starbucks” using the trademark logo of Starbucks. This infringement of trademark laws has allowed Starbuck to file a lawsuit against the company (Fuchs, 2014). Porter’s Five Forces The assessment of the competitive forces in the industry has been done by the Porter’s five forces. Figure 4: Porter’s Five Forces Source: (Kotler and Keller, 2011) Power of Buyers: The coffee house industry is highly concentrated by several established players, which reduces the switching costs for the customers. The customers have a lot of options to choose from, which reduces the uniqueness of a particular firm. Although the products offered by the existing firms are fairly standardized, but Starbucks has differentiated itself by offering a unique experience to the customers that is not offered by any other companies. This as a result reduces the switching cost, because in order to experience a better ambience, the customers need to choose Starbucks. The growing trend of the hangout in coffee houses also forces the customers to choose a coffee shop which offers a pleasant environment for hangout over a cup of coffee. Thus the overall power of buyers is moderate. Power of Suppliers: The number of suppliers in the coffee industry is quite limited. In order to procure good quality coffee beans, the coffee houses are highly dependent on their suppliers. Moreover, the sourcing of certain breeds of coffee are geographically exclusive, which further increases the dependency on overseas suppliers (ICO, 2014). The limited number of suppliers and formation of strong lobby among them allows the suppliers to control the prices of the raw materials. This as a result exerts an influence on the coffee house companies. However, owing to the high growth of the coffee house industry, the numbers of suppliers are also increasing eventually. As a result the influencing factor of the suppliers gets faded. Thus the overall power of the Suppliers is moderate. Threat of Substitutes: The direct substitute for specialty coffee products are homemade coffee and other hot beverages. Homemade coffees are highly cost effective and save time and a travelling. Moreover, due to increase in hectic lifestyle, people are switching to the use of coffee machines that produces coffees similar to the ones offered in coffee houses. However, the specialty coffee houses like Starbucks offer a non substitutable experience that attracts customers to their ambience. Thus the overall threat of substitute is moderate. Threat of new entrant: The specialty coffee industry is highly saturated by established player. These firms create a high barrier to entry, which as a result makes it difficult for the emerging companies to gain consumer preference. Moreover, establishing a coffee house requires substantial capital investment and market expertise along with good relationship with the suppliers, which may not be viable for a startup company. Establishing a good brand image also takes long time, thus for a new entrant it is quite difficult to gain consumer awareness in this industry. Thus the overall threat of new entrant is assessed to be low. Rivalry among existing firms: The specialty coffee industry is characterized by high competitiveness among the existing firms. The rival companies like Dunkin, Café Nero, Costa, etc compete among themselves in order to gain high market share by offering differentiated product and services. Some of them even go into price wars, in order to gain a competitive advantage in the mass market (Crowe, 2010). The product offering in this industry is fairly standardized, so the existing firms try to differentiate themselves by value addition through unique service offering or competitive pricing. Thus the overall rivalry among existing firms is measured to be high. Adding Value to the Current Strategic Position The value proposition and competency analysis has been discussed in the light of VRIO analysis. The VRIO analysis assesses a firm’s resources and compatibilities based on four parameters Value, Rarity, Imitation Cost and exploitability of the organization. Value: The Starbucks stores are located in strategic locations with high visibility and ease of access, like office areas, downtown, near retail centers, near universities, etc. This attracts high foot fall of targeted customers owing to the high convenience factor. The large number of Starbucks store also prevents the customers to travel long distances. The global recognition of Starbucks allows the company to high gain brand preference among the consumers. Moreover, the signature “Starbucks experience” of a friendly atmosphere, popular music, and access to free Wi-Fi attracts customers worldwide (Capgemini Consulting, 2014). Rare: The in-store environment of Starbucks store is hardly found in other coffee houses. Moreover, in order to further strengthen its reputation the company has built an establishment called “Temple of Coffee” which is a tourist attraction for coffee lovers. The temple of coffee is around 15,000 square feet in area and offers the visitors a tour of the world’s finest coffee brewing processes. It contains the company’s reserve roaster and tasting room, where the visitors can indulge themselves in to the tasting of finest coffee and witness the roasting and brewing process (Starbucks, 2014a). Imitation Cost: The imitation cost of Starbucks’ value proposition is extremely high. In order to establish a large number of stores and provide the same aesthetic environment is quite capital intensive. The high imitation cost acts as a competitive advantage for the company, as their value proposition cannot be duplicated easily. The overseas presence in more than sixty countries is something that cannot be imitated overnight. Exploitability: Starbucks has successfully recognized the changing market trend and has offered a value proposition which is compatible to it. The company uses its experience and expertise in the industry to continuously improve its operations and try to find new ways to add value for the customers. Value Chain Analysis The internal activities of the organization responsible for the value generation for an organization are assessed by the Value Chain Analysis. The proper coordination of the factors of the value chain allows the firm to increase its profitability and brand valuation (Kotler and Keller, 2011). Procurement Raw materials are sourced from African and South American countries (Larson, 2008). Development of Ethical Sourcing Program in order to establish a sustainable supply chain. Technology Development Starbucks leverages technological availability in order to provide better services and better customer experience. Use of advanced equipments to deliver instantly brewed coffee shots to the customers. Introducing mobile applications to make payments, in-store Wi-Fi, launching interactive brewing machine, etc. Establishing customer relationship through Social Media Human Resources The baristas are trained to offer standardization in product and service quality, in order to reduce cannibalization. The HR managers ensure that its employees are treated with equality and they are offered sufficient perks and privileges to motivate them. Organizational Infrastructure The company operates in the global market environment, where every store abides by the company core strategies of value addition through customer experience. The strong financial position allows the company to make strategic acquisitions in order to make horizontal diversifications. Inbound Logistics Operations Outbound Logistics Marketing Service The inbound logistics involve procurement of finest quality raw materials from overseas suppliers of African and Latin American countries. The green unroasted beans are transported from farms to the storage houses, where they are roasted, packed and sent to the respective stores via company owned or third party logistics company (Cooke, 2010) The company operates in more than 60 countries with 21,000 stores worldwide. As of 2013, Starbucks’ 79% revenue generation is accounted from self owned stores, while the rest are generated from franchises (Starbucks, 2014). The outbound logistics of Starbucks is quite minimal, as there are no intermediaries in the supply chain. Most of the company’s marketing strategies are based on need based activities. Starbucks carries out promotional activities like sample distribution which relies mostly on word of mouth. The service offering of Starbucks is mostly customer orientated, where the company focuses on delivering the best services in the market. Conclusion and Sustainability of Starbucks Starbucks has always ensured that its business strategy results are long term profitability, sustainability and future growth. The company’s overseas expansion in challenging markets prove that the firm is looking forward to a more stable and secure market position in the industry, but gaining a higher market share. Starbucks’ marketing strategies are completely focused on creating value for the customers and which supports the long term sustenance of the company. The company maintains a good communication and a strong relationship with its customers. This customer oriented approach makes sure that all the satisfied customers will make repeated purchase from the Starbucks store. As a result it will spread positive word of mouth among the consumers, which in turn will increase the brand preference among them. Starbucks has enhanced its store operations so that all the stores can provide same service and experience to the customers. Maintaining a steady consistency in product and service quality has drastically reduced the self-cannibalization of certain stores (Baer, 2012). Due to the standardization of ‘Starbucks Experience’, every store performs equally. Starbucks follows a sustainable supply chain management by maintaining a good relation with its suppliers. In collaboration with Conservation International, the company has developed the Coffee and Farmer Equity (C.A.F.E). This initiative allows the company to follow an operations process which strictly abides by certain social, environmental, quality guidelines (Lee et al, 2007). Thus Starbucks has been able to design its supply chain in such a manner that it ensures future sustainability. Thus it will ensure the long term sustainability of the coffee industry and a stable sourcing of raw materials for Starbucks (Starbucks, 2013). Reference Baer, E., 2012. Lessons from Starbucks: Building a sustainable supply chain. [online] Available at: [Accessed 29 December 2014] BBC, 2014. Starbucks eyes Vietnam expansion. [online] Available at: [Accessed 29 December 2014] BusinessLine, 2014. Coffee Board sees scope to improve per capita consumption. [online] Available at: [Accessed 29 December 2014] Cannold, J., 2011. Starbucks buys juice maker Evolution Fresh. [online] Available at: [Accessed 29 December 2014] Capgemini Consulting, 2014. Starbucks: taking the “Starbucks experience” digital. 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