Starbucks Corporation - International Segment - Case Study Example

 Starbucks Corporation - International Segment Executive Summary Formed in 1985, Starbucks Corporation is a leading coffee retailer and is considered as one of the best-known coffee brands today. Along with high-quality coffees, Starbucks offers number of other products including cold blended beverages, Italian-style espresso beverages, premium teas, coffee-related equipment and accessories, complementary food items, line of compact discs etc. Outside its outlets, Starbucks offers packaged tea and coffee products, ice creams, ready to drink beverages such as Starbucks DoubleShot and bottled Frappuccino etc. The company’s product portfolio includes Torrefazione Italia, Seattle’s Best Coffee, Starbucks Hear Music compact discs and Tazo teas. Historically, Starbucks has been well known for its hard line expansion of stores. Despite of that, Starbucks has undergone serious complications. The stock price of the company fall dramatically by $80 in 2006, and currently it is $18. Entrance of new competitors in the market such as Caribou Coffee and Peet’s Coffee and Tea has led to loss of market leadership of Starbucks. Stern competition from McDonald’s and Dunkin’ Donuts has snatched market share from the company. Therefore, there are indications for the company to experience decline in future. Despite of these discrepancies, Starbucks has remained strongest company in its relevant industry. It has numerous opportunities to increase its growth and profits. Some of the major issues, which the company is facing, include real estate and store expansion issues, customer experience, specialty operations, tough competition from other coffee retailer and fast food chains, penetrating new markets & generating more demand and declining input costs. Existing retail stores of the company need to attract more customer in order to increase sales, especially in the morning hours of rush. It must also introduce non-coffee beverage options. Introduction In 1971, Starbucks started its business in Seattle, Washington at Pikes Place as a whole bean coffee seller. Originally, the name of the location was “Starbucks Coffee, Tea, and Spices”. Later on, it started causing some confusion therefore the name was then shortened to “Starbucks Coffee Company.” Since its inception, the company’s primary goal has been to offer premier coffee to the people, both locally and internationally. In 1982, Howard Schultz started providing services to Starbucks as the director of marketing and retail operations. Since then, the company started to provide its businesses by providing fine coffee to bars and restaurants. In 26 June 1992, The Company launched its IPO at the share price of $17 and on the very first day, the share price closed at $21.50 per share. The stock of the company is traded by the symbol of SBUX on NASDAQ stock exchange. From the period of 1992 to 2000, the company continued to flourish and grow by expanding its number of stores to an astonishing 3,501 stores. During this period, in 1999, the company acquired Hear Music and Tazo Teas in hopes that people would come at Starbucks as an entertainment destinations instead of just a coffee shop. Starbucks has continuously involved in acquisitions of other diversified companies in order to transform itself from a simple coffee shop to an entertaining destination. In this regard, since 2001, it has offered high-speed internet and commenced events for musicians and local artist in the recent years. In the past years, Starbucks has intelligently diversified its portfolio from just a coffee retailer and introduced many different goods. The product portfolio of the company includes: Single origin coffee and over 30 blends of coffee Indefinite combinations of tea products and brewed coffee Food items, such as sandwiches, pastries and salads Books, film and music Starbucks liqueurs and packaged drinks Starbucks Card In addition to a wide range of product offering, Starbucks Corporation owns many brands, which it promotes including; Tazo® Tea, Starbucks Hear Music®, Starbucks Entertainment, Seattle’s Best Coffee®, Torrefazione Italia® coffee and Ethos Water. All of these successful brands are pulled together in most of the location of Starbucks. Along with the brand and products, Starbucks is considered as one of the most globally conscious corporations. In 2006, the company donated $36.1 million in form of products and cash, utilized 20% renewable energy within its stores, imposed strict environment guidelines to its growers, actively participated in recycling almost 80% of stores of Canada and US. Starbucks has developed itself not only as a coffee leader in the world but also on the platform of being environmentally and socially responsible. Throughout the years, the company has surpassed all the competition by its high quality products and emphasis on exceptional services. The company has established such a system within its business that even the lowest paid employees are encouraged to participate in the pride of the company for which they work because each employee plays his important role in order to take the company to a level where it stands right now. Strategic Analysis of Starbucks Corporation Strategic analysis determines how organizations capitalize their competencies and skills in order to best utilize the opportunities in the industry, which helps them in accomplishing their overall objectives. Various models help in conducting strategic analysis of the companies. The most widely used models are discussed in the subsequent sections of the paper. Porters’ Five Forces Model Acting Force Degree of Threat to Starbucks’ Profits Entry Rivalry Bargaining Power of Supplier Bargaining Power of Buyer Substitutes Low-mid Mid Low Low Mid Entry Within the beverage industry, independent coffee houses pose much competition against bigger brands such as McDonalds, Starbucks, Dunkin’ Donuts etc, on a localized level, since coffee is coffee. Since the input materials for the existing and new companies are same, therefore there are no as such barriers to entry. The industry lacks the technological cost, which is usually a huge initial investment therefore the start up cost, is limited. Such easy entrance in the industry indicates that long-term profit horizon will decrease within the market. For new companies entering into this market, a large amount of money needs to be spent on advertising in order to gain market share. Additionally, for new stores it is difficult to develop and grow under the shadow of Starbucks. The power and size of the company helps it in maintaining brand recognition. Despite of it, Starbucks does felt the hardness and pressure of competition, which led it to modernize and alter its strategies. Rivalry Entrance of new competitors into the industry has put Starbucks’ dominant market share under immense pressure. Since its inception, the company has stimulated the overall industry, creating a constructive spillover effect that amplified the demand of coffee beverages. Even though Starbucks expanded rapidly, but along with that local coffee houses also expanded themselves. It led to increase in elasticity having variety of substitutes available to customers serving the same products i.e. finest coffee, comfortable ambiance and friendly staff. Despite of such competition, Starbucks managed to differentiate itself from other competitors due to its business model and sheer size. It takes advantage of economies of scale and possesses a differentiated cost structure. These practices differentiate Starbucks from its major rivals. Bargaining Power of Supplier As mentioned earlier, Starbucks has huge advantage of its power, size and economies of scale. However, it can procure its inputs materials from any supplier. Because of the internal market conditions of suppliers, a single supplier cannot meet the voluminous need of Starbucks. Starbucks has number of substitutes of suppliers available and can purchase at a different price point if required. Moreover, they cannot make forward integration with Starbucks due to their lack of retail capabilities and remote locations. Therefore, Starbucks has all the power in the relations, which it has with its suppliers. Bargaining Power of Buyer Starbucks sets a price for its consumers based upon two factors; the prevailing prices of its rivals and price elasticity if consumers. Since the company provides differentiated products in terms of perception of higher quality, it is able to sell its products at a premium price. The prices are non-negotiable since the customers do not have any bargaining power against Starbucks. Due to high availability of alternatives, patrons may purchase from other coffee shops. Starbucks is concerned more about product competition than meeting the demands of individual customers in order to maintain its market share and leadership. Substitutes Starbucks holds on around 10% of the local coffee consumption therefore generic substitutions are important factors to analyze. There are wide ranges of products available to consumers such as soda pop, water, juice, energy drinks, fizzy drinks, alcoholic beverages etc. In addition to that, the most direct substitute to coffee is tea. Starbucks does own a tea brand under the name of Tazo Tea. Thus, the company has been very intelligent in hedging against the threat of substitutes by offering variety of beverages under its own brand name. Value Chain Analysis “The value chain is embedded in the company’s larger streams of activities, which are connected in linkages when one activity affects the effectiveness or costs of the other activities. Companies can attain competitive advantage when the value chain is optimized by coordinating these activities to create value for its products or services that exceeds the costs of performing the value activities.” (Porter, 1998a) Initially, Starbucks value chain system created extra-ordinary value to its products for which the customers were also willing to pay. Therefore, the company did not feel reluctant in charging premium and above-industry prices for its products. In actual, the customers do not see the prices at which coffee is being offered but they seek the brand image and the quality of products that the company offers. Despite of that, Starbucks value chain contributed to the downfall of the company. Starbucks primary activities include procuring and manufacturing the raw material and then providing the finished products to its consumers. Secondary activities include marketing and selling, human resource activities of the company etc. For the success of any company, both the primary and secondary activities must perform coherently in order to gain competitive advantage over its rivals. In case of Starbucks, the value activities were very effective initially. The co-ordination between the primary and secondary activities of the company were being managed very carefully. Such activities resulted in the added value of the final brands and products of the company. The inbound logistics, outbound logistics, marketing and selling and operations activities were in good coherence with the corporate planning, technological development, human resource management and procurement activities. The exceptional coordination among these departments created a ‘Starbucks Miracle’ and made the company a market leader within its industry. Currently, the company is experiencing a downward trend in majority of its areas. In 2008, Starbucks reported a decrease of 50% in its operating income as compared to the previous year. Revenues were also decreased by 10% as compared to the previous year (Annual Report, 2008). This decline contributed to a substantial reduction in the brand recognition of the company. The reason of such decline is believed to be lack of continuation of value chain activities in long run. An example includes rapid expansion of stores within United States. In this regard, the company managed to keep coordination between its physical activities of opening new stores and maintaining the brand image of the company, which emphasizes on exclusivity and luxury. Moreover, the company allocates a very small amount of budget on advertising, which is an integral component of a business. It also lacks a proper strategic plan, which can support the company in long run. As a result, the strategic competitiveness of Starbucks started to disintegrate and rivals commenced to cannibalize a large customer base of the company. Bradley (2003) states that, “marketing is strategically concerned with the direction and scope of the long-term activities performed by the organization to obtain a competitive edge” (p. 1). Without an adequate strategic plan, a company cannot continue to create more value to its existing products and cannot sustain competition in long run. Therefore, market rivals such as McDonalds and Dunkin’ Donuts challenge the competitiveness and strategic leadership of Starbucks. PEST Analysis PEST analysis analyzes the external environment of a business, which is beyond the control of enterprise. PEST analysis of Starbucks has been mentioned below. Political Taxation policy Any fluctuation in the taxation policy of government certainly means that the additional cost will be passed on to the customers resulting in a higher price of the coffee they purchase. On 13 June 2003, Minister of Finance, Tanzania, rationalized and harmonized local government taxation to increase the rural production of the coffee bean. For the ‘small-holder’ farmers, the level of tax was lowered. This savings was passed onto the buyers of coffee beans such as Starbucks. International stability The international market influences the sales and market of Starbucks therefore; it also needs to be considered. The consequences of 9/11 affected the global market. They are an example of economic downturn. If the global economies are at slump, then for international companies, it is not an ideal time to move forward for grand expansions. Employment law Decline in permit and licensing costs for the coffee producing countries will eventually result in lowered production costs for farmers. This can be fruitful for the purchasers of coffee beans such as Starbucks. Economic Economic Growth If the economic growth is low in the location of Starbucks, then it can hamper the sales of the company. Disposable income of consumers also tends to fall in times of economic slump. Low ‘mood’ of economy can also result in fall of consumers’ confidence in products. High rate of inflation cause the company to increase its price and set up a new price list. Competitors’ pricing Competitive pricing from rivals can start a price war for the company. It can bring down the profit margins of the company as they attempt to at least, maintain their market share. Social Income distribution Coffee is more a luxury product therefore the company needs to locate their stores where the people of higher amount of disposable income are located. Attitude to work A large number of people prefer to eat out rather than eating at the internal canteen. Starbucks can capitalize this opportunity and locate its stores where people can meet up resulting in a greater number of people in the morning or afternoon times of the day. Other factors that need to be considered by the company include age distribution, health consciousness, standard of education, working conditions, location etc. Technological IT development As far as IT development at Starbucks is considered, the company has constantly been looking to develop faster and improved facilities of internet. Moreover, it consistently upgrades and modifies its website. In 1999, it decided to bring a major upgrade in order to enable new functionality for long-term growth. In order to do so, the company upgraded to Microsoft Commerce Server 2000. As a result, the performance and scalability have improved. The company now possesses new tools to target and profile customers, analyze the data and offer new features to the market in the quickest possible time. New processes and materials The company continually brings development in the computers and coffee making machines. It allows company’s staff to perform more efficiently and quickly. By doing so, customers are served quicker which enables in serving more customers in a day. It prevents customers to line up in queues and wait for a long time. Thus, it enhances the relations with customers along with growing the customer base. SWOT Analysis The internal analysis of the company can be done by conducting SWOT analysis. SWOT analysis of Starbucks has been briefly mentioned below. Strengths Customer loyalty and brand recognition It has wide range of products in product portfolio, which caters the needs and demands of all ages and tastes. It includes food items as well as non-coffee beverages. Exceptional customer service and value of the experience of Starbucks Licensing relations with top-notch brands like Kraft and Pepsi-Cola, which facilitates in reducing costs Strong relationships with employees Economies of scale offering supplier power and greater distribution networks Primly retail stores Positive brand image in terms of corporate social responsibility Weaknesses Pay 24% more for coffee as compared to industry prices No switching cost for customers in monetary terms Saturation of the relevant industry reduces long-term benefits Limitations of expanding internationally due to cultural clashes with US coffee experiences Opportunities Possesses the ability to reduce premium charged for coffee Room to compete on multiple levels including price and quality Room for expanding internationally Increasing licensing relationships with other strong brands to obtain profits by lowering the cost to the company Threats Severe competition in the business of specialty coffee beverages Increasing prices of coffee beans and dairy products Unfavorable conditions of economy, which lower the demands of costly beverages Diverging from the experience of Starbucks Possibility of fad perception for the specialty coffee Further diversification of competitors pertaining to fast food restaurant, which cannibalize the market share Strategic Issues and Recommendations Critics believe that Starbucks has spread itself too thin by launching products such as ice creams and chocolate, which have not worked well in the market but in fact, have hurt the bottom line of the company. Company has too much emphasis on coffee brands and has very low focus on beverages such a fruit juices since a large part of customers constitute with small and school going children. Therefore, coming up with these non-coffee beverage options and amplifying their promotion will help the company in serving a larger market. Moreover, the stores are usually concentrated in the morning hours when a large number of customers visit stores for purchasing coffee before going to work. The company has substantial opportunities in increasing its business operations in the later part of the day. This strategy will help the company in increasing its sales in the morning when parents while taking care of their children visit the store locations. Since all the products are prepared in stores, therefore they must also allow customization, which can bring higher profit margins to the company. Works Cited Betz, F. (2001), Executive Strategy: Strategic Management and Information Technology.  New York: John Wiley & Sons. Bradley, F. (2003), Strategic Marketing: In the Customer Driven Organization. England: Wiley, Chichester. Clark, T. (2007), Starbucked: A Double Tall Tale of Caffeine, Commerce and Culture. New York: Little, Brown and Company. Collins, J. 2005, ‘Level 5 Leadership: The Triumph of Humility and Fierce Resolve’, Harvard Business Review, Reprint, July-August Drucker P. (1954), The Practice of Management. New York: Harper & Row. Leshner, H., Camacho, C., and Damassa, S., (2008) ‘Strategic Report for Starbucks Corporation.’, [Online] Available at: http://economics-files.pomona.edu/jlikens/SeniorSeminars/harknessconsulting2008/pdfs/Starbucks.pdf [Accessed10 December 2012] Porter, M. (1998a). Competitive Strategy: Techniques for Analyzing Industries and Competitors . New York: The Free Press.  Rushe, D. 2006, ‘Coffee Rivals Give Starbucks a Wake-up Call’, Times Online [Online] Available at: http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article673462.ece [Accessed 10 December 2012] Starbucks Corporation 2008, ‘Annual Report Fiscal 2008’, Starbucks website, [Online] Available at: http://www.starbucks.com [Accessed 10 December 2012] Stone, B. 2008, ‘Original Team Tries to Revive Starbucks’, New York Times, [Online] Available at:http://www.nytimes.com/2008/10/30/business/30starbucks.html?_r=1 [Accessed10 December 2012] Appendices Porter’s Five Forces Model Acting Force Degree of Threat to Starbucks’ Profits Entry Rivalry Bargaining Power of Supplier Bargaining Power of Buyer Substitutes Low-mid Mid Low Low Mid Value Chain Model Read More