Organization Environmental Analysis: Starbucks - Case Study Example

Organization Environmental Analysis: Starbucks of the Organization: Starbucks Coffee Company. The Business: Roaster and Retailer of Specialty Coffee. Location: Headquartered in Seattle, Washington, United States. Why Chosen: International Presence, Strong Brand. Introduction Starbucks was founded in 1971 as a roaster and retailer of specialty coffee. The company has grown steadily since inception and has more than 19,000 stores in 62 countries at present (Starbucks, 2014).   Starbucks operates in a highly dynamic business environment and its operations are affected by numerous factors. The present paper attempts to describe three general environment factors and three task environment factors that have the maximum impact on Starbucks. General Environment The general environment factors include economic, social-cultural, political-legal, environmental and technological factors. The economic, international and environmental factors exert the maximum influence on Starbuck’s operations. Economic Factors Starbucks is heavily dependent on consumer’s discretionary spending. Adverse economic conditions like high unemployment rates, low incomes, high taxes, bankruptcies and foreclosures lead the customers to tighten their purse strings. In such a scenario, consumers reduce their spending on discretionary items, which in turn, adversely affects the revenue and profitability of Starbucks.  On the other hand, Starbucks stands to gain if the economic environment is propitious. A boom in the economy has a positive effect on the performance of Starbucks.  Starbucks charges a premium price for its products. The high price is justified since the company provides an exceptional experience to its customers along with high quality coffee. In other words, Starbucks competes in the market on the plank of differentiation and can therefore charge a high price for its differentiated services and products. This pricing strategy enables the company to skim the market and earn higher revenue per customer as compared to its rivals. However, during adverse economic conditions, this strategy proves detrimental as customers move to low priced competitors. In case unfavorable economic conditions persist, there is a possibility that consumers may reduce their discretionary expenditure on a permanent basis. Starbucks has recently been battered by tough economic conditions. The latest recession of 2008 adversely affected the profitability and operations of the company. Starbucks’ net revenue slid from $10.4 billion in 2008 to $9.8 billion in 2009. The company’s comparable stores sales growth was also badly affected during the same period. Starbuck’s comparable stores sales growth was -3 percent in 2008 and -6 percent in 2009 (Starbucks Coffee Company, 2014). This establishes that customers give a cold shoulder to Starbucks when recessionary forces are operating in the economy. International Environment The International environment has a monumental effect on Starbucks as the company operates on a global scale. Starbucks Americas operating segment, which includes United States, Canada and Latin America, accounted for 74 percent of the companys total new revenue in 2013. The other segments of Starbucks based on geographic regions are Europe, Middle, East, and Africa (EMEA) and China / Asia Pacific (CAP). Starbucks has a total of 19,767 stores. Of these 13, 493 stores are located in the United States. There are 1, 969 stores in EMEA region and 3,882 stores in the CAP region. The EMEA contributed 8 percent of the company’s net revenue in 2013 while the share of CAP region in net revenue was 6 percent during the same period (Starbucks Coffee Company, 2014). The data clearly establishes that Starbucks is heavily dependent on its home market United States. It is therefore imperative for the company to further increase its global footprint. In this context, it can be argued that, going forward, the international environment will play a pivotal role in the determining the success of Starbucks. Starbucks’ international operations make it vulnerable to foreign currency exchange rate fluctuations and restrictive actions that effect international trade and investment initiated by the government of United States or by the government of any other country where Starbucks has business or intends to do business. A multitude of macro environment forces like economic, social, legal, regulatory, and political conditions in Starbuck’s international markets have the potency to affect the company’s decisions, actions and operations. These factors vary from country to country and affect Starbucks in varying magnitude. The ensuing paragraphs explain the effect of various facets of international environment on Starbucks by taking a country specific example of India. Entry mode Starbucks set foot on Indian soil in 2012 through a joint venture with India based Tata Group (Financial Express, 2012). This mode of entry has enabled Starbucks to mitigate its risks in the country as the Tata Group is well versed with the nuances of conducting business in India. Economic and social factors Starbucks was motivated to enter India due to the country’s burgeoning middle class section of the society that had the willingness to try out foreign brands and also had buying capacity to do so. Legal factors Starbucks has recently had a brush with the Indian legal system when the Food Safety and Standard Authority of India (FSSAI) blocked an imported consignment of the company containing flavored syrups. These syrups are used to prepare certain beverages sold at Starbucks stores. The company has claimed that such syrups are being imported for the last one year and the confiscation of these syrups by Indian regulators is “highly unusual” (Bailay, 2014). Political factors India is in the midst of conducting general elections right now. The party that is voted to power will form the government after the results of the elections are declared on May 16, 2014 (Mint, 2014). There is a possibility that the new government may not be in favor of foreign multinationals coming and operating in India. Some of the political parties of the country have stated in their election manifestos that they will block relaxing of norms pertaining to multiband FDI in India. If any such party is voted to power, the political environment in India may no longer remain conducive for Starbucks to conduct its business in the country. Environmental Factors Environmental forces have a major bearing on the operations of companies engaged in the business of manufacturing and marketing goods and services .These factors have hogged the limelight in recent years as concerns about global warming and its impact on the planet grow. Governments of various countries have passed laws mandating business houses to reduce their carbon footprint. Companies like Starbucks have taken the responsibility of indulging in ‘green’ business practices so as to thwart the further plundering of the environment. Starbucks recognizes the importance of sustainable business practices and goes over and above the regulatory requirements of conserving the environment. The environmental factors have affected many facets of Starbuck’s operations. The environmental factors have led to climate change, increased soil erosion and infestation of coffee producing areas by pests. Coffee farmers have reported shifts in rainfall patterns. The overall usable land for coffee production has reportedly shrunk (Starbucks Coffee Company, 2014). All these conditions establish beyond doubt that environmental forces have the potency to affect the operations of Starbucks. Addressing this crisis is thus a big priority for Starbucks. It is for this reason that the company has increased its focus to develop processes and procedures that address this crisis. The company works conscientiously to conserve energy and water. Recycle and reducing waste has become a norm at Starbucks. The environmental factors have led Starbucks to revisit its store strategy. The behemoth now designs, builds and operates stores in ways that reduce impact on the environment. Starbucks uses the US Green Building Council’s LEED certification program to guide its store strategy (Starbucks Coffee Company, 2014). Traces of environmental impact can be seen in Starbuck’s marketing strategy. The coffee chain has introduced reusable cups in UK. These high quality cups are priced at £1 and can be taken away by customers. Customers who reuse such cups are given a nominal discount (Smithers, 2013). The quest to conserve energy has led Starbucks take small but important steps in its day-to-day operations. The company claims that its stores are now chilled at 24° Celsius instead of 22° Celsius. Other initiatives include use of high-blast nozzles to clean jugs, installation of low-flow valves, use of recycled floor tiles and improvement in lighting efficiency. Task Environment The three task factors that have the biggest impact on Starbucks are competition, suppliers and strategic allies. These factors are explained in the following paragraphs. Competition Starbucks operates in a highly competitive market. It vies with numerous domestic and international coffee chains and quick service restaurants. Starbucks faces competition in both low and premium segments of the market place. Companies like McDonalds and Dunkin Donuts are successful lower priced competitors while Panera and Caribou are successful high end competitors of Starbucks. These well established rivals are present in most of the markets that Starbucks operates in.  McDonalds in particular has increased its focus on selling g high-quality specialty coffee beverages at lower prices as compared to Starbucks. Such tactics by rivals can lead to a substantial decrease in footfall at Starbucks stores.  Starbucks stands to lose revenue because of copy cat brands. These copy cat brands generally operate on a small scale so as to avoid direct confrontation with the big fish. Since the copy cat brands are priced much lower than Starbucks’ products, they tend to eat into the market share. The competition is also heating up in the packaged coffee and tea and ready-to-drink coffee beverage markets. Such competition can adversely affect the channel development segment of Starbucks.  Suppliers Starbucks’ relationship with the suppliers of green coffee forms the backbone of the company. Starbucks is heavily dependent on coffee producers, trading companies and exporters for the procurement of coffee; the heart and soul of the company. Starbucks enters into long term contracts with its suppliers to minimize the occurrence of non-receipt of materials like coffee. In 2013, Starbucks procured close to 400 million pounds of premium-quality green coffee from 27 countries. The dependence on coffee suppliers increases all the more because Starbucks is committed to source high quality coffee that meets its stringent norms. There are numerous challenges that Starbucks faces in managing such a complex supply chain (Koury, 2003). Identification and appointment of suppliers can be a daunting task for the company. If any unethical practices take place in the supply chain, it can tarnish the image of Starbucks. Disruption in energy supplies or disruption in raw material supply can also hinder the smooth functioning of Starbucks (Starbucks Coffee Company, 2014). Strategic Allies Starbucks works in collaboration with many strategic allies. These business partners operate in upstream as well as downstream activities of Starbucks and are instrumental in the success of the company. As of September 29, 2013, Starbucks had 9,573 stores licensed stores in different parts of the world. These stores, which account for 48 percent of the total stores operated by Starbucks, contributed 9 percent of total net revenues of the company in 2013 (Starbucks Coffee Company, 2014). Most of the company’s licensees are prominent retailers with in-depth market knowledge of their respective and access. Starbucks receives royalty and license fees from these allies. Starbuck’s relationship with its joint venture partners is also important for the company’s success. Its joint venture partners have thorough knowledge and market access. These strategic allies play a major role in the success of the company in international markets. India and China are major emerging economies of the world and have become the preferred destination for most multinationals (Jitpleecheep, 2013). Starbucks has entered these countries through joint ventures with local players. It has inked a pact with the Tata Group in India. In China, the coffee chain entered into an agreement with three different companies to expand its footprint in the most populous nation of the world. Some of Starbucks alliances have helped it to gain more visibility and enhance brand equity. The coffee chain entered into a deal with United Airlines whereby Starbucks became the exclusive coffee supplier on every United Airlines flight (Wall Street Journal, 2004). If the strategic alliance goes awry, it can prove costly. Starbucks’ alliance with Kraft foods helped increase the presence of Starbuck’s branded products in grocery stores. The alliance terminated a few years ago and the two former strategic allies locked horns in the court of law. Starbucks had to pay a hefty fine to settle the dispute (Farrell, 2010). Such incidents underscore the importance of having good relations with the strategic allies and following the agreement in letter and spirit. Some strategic allies also help Starbucks in its social responsibility endeavors and become a responsible corporate citizen. Starbucks partnered with Todos pela Educacao (Everybody for Education) in Brazil with the aim of supporting educational initiatives in the country. One of the initial beneficiaries of the initiative was the Oswaldo Aranha High School (Business Wire, 2006). Starbucks’ strategic alliances help the U.S. coffee chain procure the requisite quantity and quality of raw material. A case in point is Starbucks memorandum of understanding (MOU) with Ai Ni Group, a coffee-growing and -processing firm in the Yunnan province of China (Starbucks, 2014). Conclusion The aforesaid discussion establishes that economic, international and environmental factors have the maximum potency to affect the operations of Starbucks. The international environment, in particular, makes the business environment for Starbucks extremely complex as this environment varies from country to country in which the company operates. The coffee chain has to consider responses of competitors, suppliers and strategic allies while taking decisions that concern them as they are important factors in the company’s task environment. These factors have varying degree of impact on Starbucks. However, put together they affect all dimensions of Starbuck’s business; procurement, operations, revenue and even CSR initiatives. References Bailay, R. (2014). Tata Starbucks moves HC to release consignment of syrups blocked by food regulator. The Economic Times. Retrieved from http://economictimes.indiatimes.com/industry/cons-products/food/tata-starbucks- moves-hc-to-release-consignment-of-syrups-blocked-by-food- regulator/articleshow/34163190.cms Farrell, G. (2010, Nov 30). Kraft seeks $700m pay-out as price of Starbucks divorce. Financial Times Retrieved from http://search.proquest.com/docview/814879058 Jitpleecheep, P. (2013, May 14). Starbucks sets sights on China and India. McClatchy - Tribune Business News. Retrieved from http://search.proquest.com/docview/1350258282 Koury, R. (2003, Aug 13). Starbucks choice of uniform supplier grinds on union. Knight Ridder Tribune Business News. Retrieved from http://search.proquest.com/docview/461472561 (Supply Chain ) Smells like Starbucks: Coffee chain opens first India store in Mumbai. (2012, Oct 20). Financial Express. Retrieved from http://search.proquest.com/docview/1113397736 Smithers, R. (2013). Starbucks introduces reusable cups. 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