Strategic Analysis of Starbucks - Case Study Example

Starbucks: Strategic Analysis Executive Summary Starbucks is the global market leader in the coffee house industry which is best known for its highquality coffee beverages and unique customer experience. Despite being the market leader, the company has faced significant challenges within the industry by leveraging its resources and competencies. Starbucks has designed its vision, mission and values in such a way so that it can properly take care of the stakeholders’ interest. The environmental analysis of the market gives a clear indication that despite of the high competitiveness, the company is capable of leveraging the market environmental factors by efficiently designing its marketing strategies. The marketing strategy not only helps it to create a competitive advantage but it also helps to meet the needs of the customers and generate value addition for them. The investigation and the analysis of the company and the market environment suggest that the company is targeting to increase its customer base by geographic diversification and it has planned to achieve its competitive advantage by offering value addition through unique customer experience. Introduction This paper is focused on the strategic analysis of Starbucks. It covers the historical background of the firm along with the mission, vision and values. Both internal and external analysis of the firm has been covered in this paper in the light of the strengths and weakness, and PESTLE and Porter’s five forces. This is followed by the resources and competencies of Starbucks along with the analysis of its strategic positioning. Finally the paper has been concluded by highlighting the overall finding and making recommendations accordingly. The paper also consists of a section that highlights the lessons gathered from the study. Methodology Data from both primary and secondary sources have been gathered for conducting the study for this paper. The primary data has been gathered through a face to face interview with a floor manager of a Starbucks store. The secondary data about the company’s historical background has been gathered from the official website of the company. The information regarding the market environment has been collected from several authentic and relevant websites. The primary data will help to accumulate information regarding the current strategies of the company as well as conduct an internal environmental analysis regarding its strength and weakness. History of the company The first Starbucks store was established in the 1971 in Seattle by three friends Jerry Baldwin, Gordon Bowker and Zev Siegl. These three individuals were high school teachers of English and History. They got their inspiration to open their own coffee shop from a Dutch business man named Alfred Peet (Coffee, 2014). The Starbucks as we know today is quite different from what it was during the time of its inception. At first the store only sold raw coffee beans and coffee machines and equipments, which changed over a decade as the company also started to sell coffee drinks. A decade later the company appointed Howard Schultz as the head of retail operations. He was overwhelmed by the idea of espresso bars in Italy and asked the owners to apply the concept of coffee house in Seattle. This experiment was quite successful and it marked the beginning of the famous Starbucks coffee beverages. Howard found a company named Il Giornale, which later on acquired Starbucks (Starbucks, 2011). The acquisition of Starbuck was financially supported by a lot of local investors and the name of the company was officially changed to Starbuck Corporation. The company decided to make geographical diversification and opened up stores in Vancouver and Chicago. By 1987, the total number of Starbucks outlet was 17, which increased to 55 by 1989 and 84 in the next year. In the year 1992, the company went public and it was able to expand its business from the $27 million gathered from the stock prices (Grant, 2013). The number of Starbucks store was increased drastically to increase the local brand awareness of the company. The first overseas expansion of the company was made in Japan followed by the UK. Although, Starbucks has faced several ups and downs over the years but it has currently managed to hold the leading position in the global coffee house industry. Mission Vision and Values The vision of Starbuck is to offer the customers a unique experience that “inspire and nurture the human spirit” (Starbucks, 2003). The company has always strived to create a differentiating factor on the grounds of service provision. It is focused on offering a distinctive experience rather than just a cup of beverage. The company wants to be best known as the best place for hangouts for customers and create valuable memories. Therefore, the vision of Starbucks is to create a unique experience for the customers by creating value addition in terms of service offering and in-store ambience. The short term strategic objectives of the firm are reflected in the mission statement of the company. The company highlights its focus on delivering the best the best quality of coffee to the customers. It has also highlighted that the ethical sourcing of raw materials is also quite important for the company to ensure sustainable business operations. Every step of the firm’s operations is taken with great care so that it is capable of adding value to all the stake holders including the customers (Starbucks, 2014). The company wants to create each Starbucks store as a one stop destination for the customers to socialize and hangout. The stores are a part of the society, which make the company obligated to take care of the social interests. The mission statement of the company also includes the company’s responsibility towards the environment. Starbuck has effectively taken steps to deal with environmental issues and collaborate with several business partners in this regard (Grant, 2013). External Environmental Analysis PESTLE Analysis The external environment of the market has been discussed in the light of the PESTLE analysis. This highlights the potential influence of each of the PESTLE factors on the operations of the company. Political: The political factors of a region largely influence the business activities of a firm. The political framework highlights the relationship between different countries, which is quite important for Starbucks as it sources its raw materials from different countries like Brazil, Vietnam, Costa Rica, etc. Thus if the political relationship these countries and the home country deteriorates then it will directly affect the supply chain of the company (Grant, 2013). The company has established its stores in several overseas locations such as China, Germany, Thailand and UK, to name a few (Dudovskiy, 2015). Thus any instability in the political structure of these countries may lead to social dispute, which in turn can hamper the business operations of the firm. Changes in the political framework can also influence Starbucks, as sudden changes may compel the company to make drastic changes in its operational activities. Economic: The success of an industry and its firms are dependent on the economic condition of the region. The affordability of the customers is determined by the economic condition of the nation (Kotler and Keller, 2011). Since Starbucks offers its products at a relatively high price, any downfall in the economy is bound to reduce its sales volume. The European Crisis in the year 2008 drastically reduced the affordability of the customers which as a result reduced the revenue of Starbucks (Landler, 2008). Thus, the company has carefully selected its area of diversification so that its economic condition is stable enough to support the business operations of the company and the prospective customers have the necessary affordability to purchase Starbucks coffee. Social: The social structure of a region is largely responsible for the preference of a particular product and it also gives a clear idea of the generic behavior of the consumers (Kotler and Keller, 2011). Over the years, the amount of coffee consumption and visiting to coffee houses has increased rapidly (ICO, 2011). The customers are supporting the coffee house culture and are increasingly visiting coffee houses to socialize with friends and family. This as a result has increased the overall sales and consumer preference for Starbucks. Owing to the globalization, there has been a rapid spread of the western culture among several developing economies. As a result, the culture of coffee house is gaining popularity in several nations. However, certain challenges have come up for Starbucks owing to health concerns among the consumers pertaining to sugar and caffeine consumption. Nevertheless this issue is not so grave in terms of making any drastic influence over the company’s growth (Dudovskiy, 2015). Technological: The technological availability of a region largely influences the operational activities of a firm. The rapid technological advancement has allowed Starbucks to improve its coffee preparation process, thereby improving the product quality. Moreover, using advanced brewing equipments allows the baristas to provide quick and standardized service to the customers. Technology has also helped the suppliers to produce large volume of good quality coffee beans by leveraging agricultural innovations. The company has also introduced Wi-Fi in their stores to add more value for the customers. Thus, it can be stated that the technological availability has enabled Starbucks to greatly improve its business operations (Grant, 2013). Environmental: The environment imparts certain influences in the operations of Starbucks. According to the reports of Huxsted (2014) severe climatic changes are deteriorating the coffee production volumes. Environmental factors like increased rainfall and rising temperatures along with the spreading of pests have reduced the coffee production drastically (Frame, 2015). This as a result hinders the coffee producers to meet the increasing demand of the customers which has doubled over the past 40 years. The opportunities derived from the above environmental analysis suggest that the rapid technological growth has the potential to open new doors for the company on the grounds of product and service development. Moreover, it will also help the company to enhance its relationship with the customers. The political environment in most of the countries where Starbucks operates is quite stable this as a result brings seamless potential for the company to expand its operations. However, the after effect of the economic crisis is still lingering in some parts of the world which as a result may hamper the profitability of the company. The legal framework may pose as a serious threat if the company chooses to avoid tax payments and employ other unethical means to run its business. Porter’s five forces analysis The Porter’s five forces have been used to analyze the competitive forces of the industry. Figure 1: Porter’s five forces highlighting the competitive forces in the industry. Source: (Created by Author) Buyers’ Power: The power of buyers exerted in a particular industry is determined by their switching cost. The lower the switching cost, the higher is their bargaining power (Kotler and Keller, 2011). The specialty coffee and the coffee house industry consist of several well established players that offer almost identical products (Statista, 2014b). This as a result leads to availability of several of options for the customers where they can easily choose between them. High availability of identical products increases the power of the customers. However, companies like Starbucks has developed certain inimitable value proposition for the customers in terms of service quality and offering a unique experience for the customers. Therefore, in order to experience the high service quality and unique in-store ambience, the customers are compelled to visit particular stores as those values are not available with any other firm. This as a result reduces the power of the customers. Thus, the overall power of the buyers has been assessed to be moderate. Power of Suppliers: The fact that the number of countries producing high quality coffee beans as raw materials is limited also reduces the number of high quality suppliers. The major industry players that seek to offer high quality coffee to the customers are therefore dependent on the limited number of suppliers. This involuntary dependency increased the power of the suppliers. The supplier firms are able to form a lobby among themselves and are capable of exerting influencing over the price of raw materials thereby controlling the profitability of the specialty coffee companies (Cooke, 2010). However, over the decades the global consumption of coffee has increased drastically which as a result have increased the market demand. Thus the number of supplier firms has also increased over time (Statista, 2014a). As a result, the controlling influence of the supplier over the coffee house firms has gradually reduced. Moreover, the financially strong coffee house firms like Starbucks has opted for vertical downward integration and owns various coffee farms which as a result also reduces the power of suppliers (Gruley and Patton, 2014). Threat of Substitutes: A substitute is a product segment that acts as an alternative to the main product by offering certain identical values to the customers. The direct substitutes of the specialty coffee and the coffee house industry are the homemade or home brewed coffee and other alternate hot beverages. Homemade coffee is much cheaper than the coffee drinks offered by the major industry players and it also saves time for the customers. Moreover, owing the busy and hectic lifestyle of the customers, they are adopting the use of coffee machines and switching to homemade coffee beverages. However, the value proposition of the major coffee houses is not only in terms of offering good quality coffee, but also on the grounds of creating a unique experience for the customers (Grant, 2013). Therefore the coffee drinks can be substituted to some extent by home brewing but the service offering and the in-store ambience is also impossible to replace by any substitute. Thus, the threat of substitute is assessed to be moderate. Threat of New Entrants: The barrier to entry of an industry determines the level of threat of the new entrants. Higher the barrier to entry lower is the threat of new entrants (Kotler and Keller, 2011). The global specialty coffee and coffee house industry is dominated by financially strong firms which strong brand image (Statista, 2014b). Therefore, any new firm entering in this industry is most likely to face severe competition from large industry players. Moreover, establishing a coffee house chain is quite resource extensive and requires huge amount of capital for financing their business (Statista, 2014c). The new firms will also need to have a good relationship with the supplier in order to ensure that the supply chain is running in the desired fashion. Building a good relationship takes a long period of time, which makes it difficult for the new entrants to enter in the industry. Thus the overall threat of new entrants is assessed to be low. Rivalry among existing firms: The coffee house and specialty coffee industry is highly competitive in nature with the presence of multiple well established firms like Costa, Starbucks, Dunkin, Cafe Nero, etc (Marketline, 2014). These firms seek out new strategies to gain market share and establish a stronger brand image. In order to achieve that they try to create differentiation in terms of adding more value for the customers which may be on the grounds of offering the finest taste in coffee or the most unique in-store ambience or fostering long term relationship with the customers by providing best services. Some of the firms employ certain market penetrating strategies like offering identical products at lower prices and offering complementary services like free Wi-Fi (Grant, 2013). Thus it can be stated that the rivalry among existing firms is quite high. The opportunities derived from the competition analysis includes the firms’ potential to enhance its vertical integration so that it can have complete control over the supply chain management and also that it will not have be dependent on the suppler firms for procuring raw materials. The high competitiveness suggests that the industry is in its growing phase which holds future prospects for the company. However, the threats derived from the competition analysis are quite significant. The growing attractiveness of the industry may attract a lot of firms to the industry, thereby further increasing its competitiveness. The increasingly hectic lifestyle of the customers may increase the threat of substitute in the near future, where the customers will prefer to have a quick homemade coffee than visiting a coffee store. Internal Environmental Analysis Strengths and Weakness Strengths Weakness Leadership position of Starbucks in the coffee house industry Strong brand image Good customer relationship The company holds a strong financial position Internal cannibalization due to large number of stores. Facing lawsuits against law suits. Overdependence on the beverage sales. Strength: The strength of a firm mostly lies in its high consumer preference and strong brand image. Starbucks holds the leadership position in the coffee house industry which allows it to cater to a large customer base and generate higher revenue. The high brand preference of the consumers also helps Starbucks to draw new customers and achieve competitive advantage over its rivals (Larson, 2008). The company is best known for its value addition, which is leveraged by the company to secure its position in the highly competitive industry environment. Apart from offering the best quality coffee, the firm offers a unique coffee drinking experience that act as a distinguishing factor for the company. This has been achieved by the company by designing the in-store ambience in a unique manner, that supports socializing and hangouts with friends (Starbucks, 2003). The company also ensures that the employees are properly trained to deliver the best service quality and engage in a close relationship with the customers. This as a result leads to customer retention and customer loyalty. Starbuck also offer free unlimited Wi-Fi connectivity to the customers visiting the stores in Canada and the US. This encourages the consumers to spend more time inside the store (Grant, 2013). As of 2014, the revenue generation of the company is recorded to be $30.24 billion (Statista, 2014b). The strong financial position of Starbucks also allows it to incorporate technological developments that help it to add more value to the customers. Introducing advanced machinery and brewing equipments allow the company to improve the service and the product quality as well. Weakness: A large number of Starbucks outlets had faced internal cannibalization. This is mostly due to the lack of standardization and revenue leakage from a lot of poorly performing stores. Moreover, the revenue of the company was also affected by the financial crisis (Merced, 2008). Starbucks’ business operation is highly depended on the coffee beverages. Although the company offers a wide portfolio of food and beverages, but it is still dependent on the coffee drinks business. This over dependence may as a result lead to financial downturn for the company in the near future, if the coffee business should follow a downwards slope. The brand image of the company has been severely hampered after the lawsuit against unethical tax practices. In the year 2012, the company was alleged that it did not pay the sufficient tax and have unethically shifted its profits of the UK to other European countries (Campbell, 2014). This tax avoidance activity of the company has resulted in facing penalties from the government. The UK citizens were quite dissatisfied by this incident and they deliberately decided to avoid visiting Starbucks stores. The company has also faced several instances of product recalls in the organic fruit juice sectors, thereby tarnishing the brand image of the firm. Value Chain Analysis The value chain analysis of the company also gives a clear insight of how Starbucks leverages the firms’ internal environmental conditions to generate value for the consumers and for itself. Procurement The raw material that is the green coffee beans are procured from the best suppliers in order to ensure high quality finished products (Grant, 2013). Starbucks utilizes its ethical sourcing program to maintain a sustainable supply chain management. Technological Development The company utilizes top of the line equipments to achieve faster service response and improved and standardized product quality. Technological development such as introducing mobile applications to make payments and offering free Wi-Fi to increase consumer preference (Grant, 2013). Human Resources Starbucks makes sure that there is equal treatment of the employees to increase their motivational levels. The company offers rigorous training to the employees and baristas so that they can offer the best possible service for the customers (WorldCity, 2014). Organizational Infrastructure The company holds a strong financial structure that allows it to invest in business expansion (Starbucks, 2014) Inbound logistics Operations Outbound Logistics Marketing Operations Service provision The inbound transportation of the raw materials is conducted from high quality coffee producing countries like Vietnam, Costa Rica, etc. The company obtains unprocessed green coffee beans from these countries (Grant, 2013). The operational process of the company involves roasting the raw coffee beans and brewing process mostly takes place after the customer has placed the order. In this way the company is able to provide freshly brewed coffee for the customers (Marketline, 2014). Since the company acts as final recipient of the raw materials, so the outbound logistics is irrelevant. The company mostly relies on non-traditional promotional activities like sample distribution, word of mouth, etc. The company also opts for the print medium to increase its brand awareness (Larson, 2008). The service offering of Starbucks acts as its differentiating factor owing to its unique in-store ambience and high levels of customer relationships (Grant, 2013). Resources and Competencies Starbucks has successfully developed its resources and competencies which as a result have pushed it to the leadership position. The VRIO analysis has been conducted to get a clear insight about the company’s resources and competencies. Value: Starbucks has always kept its focus on delivering the best customer service along with the best quality coffee. The company has developed its signature “Starbucks Experience” by combining the best service quality along with the in-store ambience (Grant, 2013). The strategic location of the outlets also adds value to the customers by reducing their time cost. Rare: The in-store ambience of the firm is quite rare and the company has also ensured that the service quality is also unique in the industry (Larson, 2008). Imitation cost: The value proposition of Starbucks bears a high imitation cost as it is quite difficult for rivals to duplicate them. The rivals can duplicate the product quality, but duplicating the brand image is almost impossible. Organizational Exploitability: Starbucks has offered the best value proposition by recognizing the changing trends in the market and leveraging the consumer preference for specialty coffee. These factors have helped Starbucks to generate a strong competitive advantage in the industry and to maintain its leadership position. Strategic Positioning The strategic position of the company defines its current status in the market and it also give a clear insight regarding the direction it is headed. The products and services of Starbucks have a high perceived value and are offered at a high price. This suggests that the company is following focused differentiation strategy (Starbucks, 2014). Starbucks operates in a relatively narrow segment of specialty coffee and has specialized in that particular segment only. Moreover, the high price tag indicates that the company mostly targets the upper and upper middle class of the society. The company justifies the high price with the fact that it offers a unique experience to the customers which creates great memories for them. The Ansoff’s matrix indicates that the company pursues the market development strategies. Starbucks is constantly expanding its business in terms of geographical diversification and it enters new market with the existing products line up. The company maintains consistency in terms of delivering product and service quality in a global perspective (Larson, 2008). Figure 2: Ansoff’s Matrix Source: (Kotler and Keller, 2011) The company has always ensured that its return on investments is always long term in nature. It has always focused on creating a close relationship with the customers and is perceived as a brand that operates with a people oriented approach. The company also takes care of the interest of employees along with that of the customers. Starbucks employs a democratic leadership style where the employees are involved in the decision making process. This as a result improves their motivational level and drives them to work harder and to feel like a part of a big family (WorldCity, 2014). Conclusion and Recommendation Starbucks has ensured that its business operations are in line with its vision and mission statements and its strategies are focused towards value addition for the customers. The environmental analysis of the industry suggests that the company operates in a highly competitive environment where each firm competes to gain the maximum market share. The global trend of increased coffee consumption and the rise in popularity among the consumers of socializing in coffee houses has acted in favor of the company. In the increasingly competitive environment, Starbucks has been able to differentiate itself in terms of service quality and offering a unique customer experience. The strategic positioning of the company indicates that it uses a market development strategy, which has allowed it to make huge geographical diversification, thereby pushing its existing product in new markets. The relatively narrow product line offered at a higher price suggests that Starbucks caters to the niche customer segment with high disposable income. The company also ensure that it is capable of running its business for a longer period of time, therefore it always prefers to have sustainable sourcing and that its operational impact on the environment and the supply chain in as low as possible. Starbucks has been successfully able to leverage its resources and competencies so that it can increase it revenue generation, strengthen its brand equity and create a strong competitive positioning that will help it to maintain its leadership status for a long period. It is recommended that the company needs to diversify to other segments of the food industry. This as a result will not only increase its customer base but it will also reduce the over dependency of the company to a single business unit. It can easily sell new food products by leveraging its high brand awareness and worldwide distribution channel. Currently the company seeks out for market development, where it introduces its existing product in new markets. In order to increase the customer preference even further, it should redesign its product line based on the culture and demographics of the new market, thereby going for a diversification strategy. This as a result will help the company to cater the each market segment according to its preference. Starbucks also needs to focus on the mass market along with the niche market. So, apart from continuing with the premium priced coffee beverages, it should also introduce low price beverages for the mass market. This will help Starbucks to further increase its product portfolio and achieve higher market share. Currently, the company only relies on the word of mouth of the customers, which may not be sufficient to create a strong brand recall in the near future. Therefore, Starbucks should also emphasize more on introducing television commercials and internet advertising. Learning from the project This project has given me a clear insight regarding the operational activities of Starbucks and how it has recognized the market trends and successfully met the varying needs of the consumers. It has clearly shown that in order to reach the leadership position in the industry, it is essential to maintain a clear differentiation from the existing players of the industry. Starbucks has achieved this by maintaining a unique experience for the customers that helps to create a strong top of the mind brand recall and break the existing clutter. This project has also highlighted that it is imperative for a firm to enhance its strengths and mitigate its weaknesses. Starbucks has maintained a premium pricing in the industry and targets at the higher social segment which although increases the brand equity of the firm, but at the same time limits the access to a wider customer base. References Campbell, P. (2014). 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