Starbucks Coffee Industry - Case Study Example

Starbucks coffee industry Table of Contents Starbucks coffee industry Table of Contents 2 Executive Summary 3 Introduction 3 Theoretical Background4 Environmental Scanning 6 External Environmental Trends 7 Analysis and Recommendations 8 References 10 Executive Summary Business organizations are essentially operating in an age of increased market competition in which there is a cut throat market competition among the market players to grab a share of the market. The present study would try to analyze the four common business strategies of differentiation, low-cost leadership, and best cost and focus strategy. The organization selected for the study is Starbucks which is a major coffee retail chain based in USA and has operations across numerous areas of the globe. The study would include a theoretical analysis highlighting the advantages and disadvantages of each of the strategies mentioned above. In addition the study would also take into account the similarities and dissimilarities between the chosen set of business strategies. Furthermore the study would analyze the external environmental aspects that govern the coffee industry. This would be followed with an analysis for the trends of the coffee industry that would include an industry analysis of the entire industry. Finally a set of strategies would be proposed for Starbucks from among the chosen set of four generic strategies that would help the firm gain and consolidate its market share in the market and to help generate sustainable competitive advantage in the long run. Introduction In the age of increased market competition it has become inevitable for business organizations to purse strategies that differentiate their product offering from the others in the market. Porter proposed a set of three strategies namely focus strategy, differentiation and cost leadership that can be followed by firms to gain market advantage. Firms like Wal-Mart incorporate a single strategy like cost while there are others that use a combination of these strategies to create a hybrid strategy to generate advantage for them in the market. The choice of strategy largely depends upon the nature of the business and the target market segment considering the fact that each set of strategy has its own set of advantages as well as disadvantages (Griffin, 2008, p.207). Firms should therefore analyze their internal as well as external aspects before undertaking and implementing a business strategy. This would help them take the best advantage of the market conditions and would also help them channelize their internal resources and capacities to create favorable positioning and brand image of their brands and organization in the minds of the target market audience. Theoretical Background Depending upon the internal and external aspects influencing an organization it is necessary to adopt any of the four strategies namely differentiation, low-cost leadership, best cost and focus strategy. The matrix below lists out the similarities and dissimilarities of these strategies. Strategy Type Advantages Disadvantages Focus Focus Strategies help generate efficiency and promote greater learning and innovation. It helps firms to concentrate to a single segment and analyze their needs more effectively (Moore, 2008, p.84-85). Concentration on a single segment can be disastrous if the key differentiators are imitated by another market player. Narrowing down of difference within the target segments can lead to business risk (Longenecker et.al, 2005, p.66) Differentiation Helps beat the market competition. Generate new products across different segments and reduces the business risks and uncertainties (Parnell, 2003, p.91) Loss of cost based advantage Imitation of key features by competitors (Wit & Meyer, 2010, p.343) Low Cost Leadership Ability to take greater advantage of demand and supply factors. Reduction of market risk (John & Harrison, n.d., p.82). Too much focus on cost can lead to deviation from the market and customers. Product aspects like quality and safety may be compromised (John & Harrison, n.d., p.85). Best Cost Helps combine advantages of low cost and differentiation. Helps reduce cost and improve efficiency (John & Harrison, n.d., p.85). Combination of low cost and differentiation can lead to a state of confused positioning (Thompson et.al, 2006, p.132). The four strategies shown above are in some ways largely correlated with every strategy having a basis from the fact that each of these strategies lays emphasis on being accountable to the market demands. Each of these strategies is based on the aspect of internal as well as external market conditions. Each of the strategies lays stress upon the aspect of analyzing and understanding the demands of the customers. For example focus and differentiation strategies are largely based upon the aspect of innovations and the ability to provide distinguished and differentiated service to the customers. However differences also exist primarily because of the reason to accommodate the firm’s strategy and direction by aligning them with the internal strengths of the company. Environmental Scanning The coffee industry is one of the most attractive industry segments with the commodity being valued as the second most valued commodity after oil in the international market. The fortunes affecting the coffee industry is largely determined by the aspect of demand and supply of the product. The growths of coffee shops like Starbucks have given a new dimension to the industry. The product is now available in various formats that make it attractive to the customers. In addition to this the product is also affected by the level of disposable income as it is largely pursued to be a leisure product rather than a necessity. Market demand and supply seems to be the most important driving force in this industry that drives the business prospects of the market participants (Hopp & Foote, n.d., p.429). Economically coffee as a product has a low value of elasticity considering the fact that the product is not perceived as an item of necessity and there are very close substitutes available for the product. This results in a severe price competition that lowers the margins for the producers as well as the retailers or the manufacturers. The coffee industry suffered a major setback during the years of the recent economic turmoil. However with most of the economies on the route to revival there has been a rejuvenated interest in the product. Moreover nations like India and China are also emerging as good opportunities for organized market players owning to the popularity and the large scale influence of the Western culture due to the advent of globalization (Stanford Graduate School of Business, 2004, p.4, 6). External Environmental Trends Coffee industry has its largest market in the United States where the product is largely more favored as compared to other European or Asian nations with coffee becoming the largest sold beverage after soft drinks. Individuals across US are more favored towards coffee as compared to tea that makes it the largest market for coffee industry players (John & Harrison, n.d., p.170). Coffee prices have rose very sharply in the last year with average prices of Arabica being pegged at 134.41 US cents per pound that shows a considerable increase over its price in the previous year. The main reason for the decline can be attributed to the dip in the production levels of some of the coffee producing nations. The dip in the coffee production levels in the year reduced by about 6.5 percent that is roughly around 119.8 million sacks as compared to 128.2 million bags produced in last year. Geographically the dip in the production levels was felt in all parts of the world including Brazil that is the largest producer of coffee berries. The decline in production was mainly attributed to poor climatic conditions and outbreak of several infectious diseases in the nations. This has led to a sharp increase in the price of raw materials that has severely affected the demand supply dynamics of the industry. The consumption figures for coffee also show a significant dip in their volumes with sales volumes plunging to 130.2 million bags as compared to the sale of 131.7 million bags of coffee in the previous year. The most notable reason for the fall in the consumption levels of coffee can be attributed to the dip in the levels of disposable income of individuals across the globe particularly US that were in the midst of a severe economic downturn. The coming year however promises good prospects for the industry with the advanced economies on the path of recovery and good signs of market demand from the developing nations like India and China. A large number of programs have been planned to increase the production levels and promote marketing campaigns to increase the consumption of coffee among the individuals across the globe (ICO, 2010, p.7, 8). Market competition has also increased with large number of players entering the retail coffee industry. Market players are coming up with varying combinations of the beverage to generate a considerable demand for the product in the market. Analysis and Recommendations The analysis of the coffee industry reveals considerable prospects as well as cautious signs. In this regard Starbuck’s can ideally implement a hybrid strategy of differentiation and best cost strategies. This would help the firm to segregate its products and services and also target multiple consumer segments. Pursuing a hybrid strategy would also enable the company to provide greater value for money to the customers. Implementation of this strategy would help the company to target multiple consumer segments and also provide price advantage to the customers. This would enable the company to cater to the customers at a time when their disposable incomes have dipped. Starbucks can use its exiting brand image and positioning along with innovations in the product line to create a differentiation of its products as compared to its competitors in the market. The company can use various flavor mixes to generate a new enthusiasm among the customers. Using a local tastes and flavors would also be in tune with the popular and successful strategy of thinking globally and acting locally. In this manner it can create favorable positioning among the customers and also beat the competition existing in the market. Starbucks can also undertake a market penetration exercise to expand into new market territories so as to gain a better market share in the target market. The company can use its brand image to successfully make inroads into the newer market segments that would provide greater sustainability and stability to the company. Implementation of a hybrid strategy would also help in enhancing the knowledge curve of the company and to reduce the cost of production for the products. This can give the company a long term advantage that would help generate long term sustainable competitive advantage for the organization that would enable it to emerge and consolidate its leadership in the market. References Griffin, R.W. (2008). Management. Cengage Learning. (http://books.google.co.in/books?id=R-OvGf0pvK8C&pg=PA664&dq=Griffin,+R.W.+%282008%29.+Management&hl=en&ei=SBVmTtTQDIzirAfux_SMCg&sa=X&oi=book_result&ct=result&resnum=3&ved=0CDcQ6AEwAg#v=onepage&q&f=false) Hopp, H. & Foote, R.J. A Statistical Analysis of Factors that affect prices of Coffee. Retrieved September 5, 2011 from http://www.jstor.org/pss/1234111. ICO. (2010). ICO Annual Review 2009-10. Retrieved September 5, 2011 from http://ico.heritage4.com/heritage/heridata/ico_pdf_docs/cy2010-11/documents/annual%20review%2011-e.pdf. John, C.H. & Harrison, J.S. Strategic Management Fundamentals. South Western Cengage Learning. (Scanned copy sent as case instructions) Longenecker et.al. (2005). Small business management: an entrepreneurial emphasis. Cengage Learning. (http://books.google.co.in/books?id=IUwInqMdlkcC&pg=PR18&dq=Longenecker+et.al.+%282005%29.+Small+business+management:+an+entrepreneurial+emphasis&hl=en&ei=0hVmTv_fB4OyrAfL9aj_CQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CC8Q6AEwAA#v=onepage&q&f=false) Moore, C.W. (2008). Managing Small Business. Cengage Learning EMEA. (http://books.google.co.in/books?id=kqc2FMfH8UQC&printsec=frontcover&dq=Managing+Small+Business+Moore,&hl=en&ei=BxZmTs35G4rlrAetqZWBCg&sa=X&oi=book_result&ct=result&resnum=1&sqi=2&ved=0CC8Q6AEwAA#v=onepage&q&f=false) Parnell, J.A. (2003). Strategic Management: Theory & Practice. Dreamtech Press. (http://books.google.co.in/books?id=MzYUt7o5VKkC&pg=PA159&dq=Parnell,+J.A.+%282003%29.+Strategic+Management:+Theory+%26+Practice&hl=en&ei=IhZmTuOQKMyqrAez4YmvCg&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDIQ6AEwAA#v=onepage&q&f=false) Stanford Graduate School of Business. (2004). The Global Coffee Trade. Retrieved September 5, 2011 from http://www.probeinternational.org/files/The%20Global%20Coffee%20Trade.pdf. Thompson et.al. (2006). Crafting And Executing Strategy 14E. Tata McGraw-Hill Education. (http://books.google.co.in/books?id=AE6MeqUD2msC&printsec=frontcover&dq=Crafting+And+Executing+Strategy+14E&hl=en&ei=PhZmTvCENMqyrAfHj5j8CQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDIQ6AEwAA#v=onepage&q&f=false) Wit, B.D. & Meyer, R. (2010). Strategy Synthesis: Resolving Strategy Paradoxes to Create Competitive Advantage. Cengage Learning EMEA. (http://books.google.co.in/books?id=A7s-EYuPg7wC&pg=PA466&dq=Wit,+B.D.+%26+Meyer,+R.+%282010%29.+Strategy+Synthesis:+Resolving+Strategy+Paradoxes+to+Create+Competitive+Advantage&hl=en&ei=VhZmTs3uHsHrrQfun-2PCg&sa=X&oi=book_result&ct=result&resnum=2&ved=0CDEQ6AEwAQ#v=onepage&q&f=false). Read More