Business Operations and Competitive Advantage at Starbucks - Case Study Example

Business Operations and Competitive Advantage at Starbucks Company Background Starbucks began as a retailer of specialty coffees in Seattle in 1971, and took on the form in which we now recognise it today in 1987 when Howard Schultz, founder of a small chain of European-style coffee shops called Il Giornale, bought Starbucks and its name. Schultz had first become familiar with Starbucks a few years earlier while working as a salesman for a distributor of specialty kitchen supplies. He signed on with the company as Director of Operations and Marketing in 1982, leaving in 1985 to launch Il Giornale, which was inspired by his experience of espresso bars in Italy (Koehn, 2001: 7-10). Starbucks expanded rapidly from the original three Il Giornale outlets – two in Seattle, and one in Vancouver, British Columbia – to over 1,000 stores by 1996, when the company opened its first store outside North America in Tokyo (Koehn, 2001: 1, 22-23; Paryani, 2011: 2). By the end of 2009, Starbucks had over 16,000 stores worldwide: Fig. 1: Starbucks’ Growth, 1987-2009 (Source: Paryani, 2011: 2-4) The market for specialty coffee shops is evidently quite strong, as evidenced by the rapid growth of Starbucks and the concentration of stores in small areas. The coffee market is in general recession-proof; although Starbucks was forced to contract a bit in the wake of the global financial crisis in 2008 (see Fig. 1 above), customers generally do not sacrifice their ‘coffee comfort’ in rough economic times (Stewart, 2003: 10). In one respect, however, this has also presented a competitive challenge for Starbucks, as others such as Chicago-based Gloria Jean’s coffee, and in recent years McDonald’s have also been able to expand in the sector (Koehn, 2001; Glover, 2008, 2009). This relatively consistent high demand has permitted Starbucks to pursue a strategy of maximising visibility and brand awareness and reducing delivery and management costs by saturating an area (Daniels, 2003: 139), which leads to a strong competitive market position. Generally, this is accomplished by opening a “hub” or flagship store in a new area to establish a presence, which can serve as a base for training and management for new stores (Koehn, 2001: 19). Starbucks maintains fairly tight corporate control over its stores to ensure consistency as well. Except for small kiosk-type outlets in captive markets such as hospitals, airports, and bookstores, all North American stores are company-owned, as are stores in the UK, Japan, Australia, and Japan; stores elsewhere are licensed, but are generally joint ventures between Starbucks and a local partner (Koehn, 2001; “HR Company Profile: Starbucks Corporation”, 2003). This strategy of market saturation and centralised overall control gives a clue as to the focus on competitive advantage for Starbucks. The company seeks to maximise the “Starbucks Experience”, positioning itself as a “third place” (after home and work) for the typical Starbucks customer (Paryani, 2011: 7-8). This means that the critical part of Starbucks’ operations is the part the customer experiences directly, the flow of processes within the individual Starbucks store. Operational Analysis Assessing the Customer Service Process The customer service process at Starbucks is consistent in every store. In a typical transaction, the process begins with the customer being greeted by the barista manning the cash register; the customer then gives his or her order for a coffee drink. The barista repeats the order aloud in a pre-defined format: Size of drink; type of milk/cream to be added; type of drink; customer’s name. For example, “Triple Venti [Venti is a large-size cup, triple indicates how many shots of espresso it should contain] no-whip [as in, no whipped cream on top] mocha [a cafe mocha is a combination of espresso, cocoa, and milk, usually prepared with whipped cream on top, but in this case not], for (customer’s name).” The barista behind the counter preparing the drink then repeats the order aloud in the same manner, a simple poka-yoke technique to reduce errors and ensure the drink is made correctly the first time (Gill, 2007). Fig. 2: Starbucks Service Process (Source: Paryani, 2011: 11) This operations process can be assessed in terms of the Four V’s model (Slack, Chambers, Johnston & Betts, 2009: 21-22) Volume: HIGH. Starbucks’ stores have very high volume. An indication of this is that overall, the company’s retail traffic has increased by 6% to 8% per year, and in North America, the typical Starbucks customer visits a store 18 times per month (Zhang, 2006: 18). When volume is high, much of the process can be standardised, resulting in lower unit costs. This can be seen from the diagram above, where there is only one step in the process which has more than one path. Variety: LOW. Although in one sense variety of outputs is very high in Starbucks’ process because each customer can order a completely customised coffee drink, the high variety is mitigated somewhat by the fact that the output is all of one basic type – drinks made of coffee. The drinks all have just three basic ingredients: coffee, flavouring, and a milk product. Even though they can be combined in various ways, they are still a small number of variables the process has to manage. Low variety leads to lower process costs. Variation: LOW. The very high volume for Starbucks’ process also indicates a low degree of variation. While every store likely has “busy” and “slow” periods, this is relative; overall, demand is high, as indicated by the growth and frequency of visit figures explained above; most customers find themselves queuing to make orders at any given time (Debo & Veeraraghavan, 2009: 83). Because the demand is consistently high, this indicates low variation, which leads to lower process costs. Visibility: HIGH. As can be seen in Figure 2, the Starbucks process is entirely visible to the customer, with only support operations such as inventory and human resource management occurring “backstage” (Paryani, 2011: 11). High-visibility operations result in higher process costs. Overall, Starbucks has low process costs because of high volume, low variety and low variation. These processes more than compensate for the high process costs of high visibility, and allow Starbucks to maintain a very visible operation as part of the customer “experience.” Capacity Management Issues Capacity management must consider both predictable and unpredictable fluctuations in supply and demand, but for most retail businesses, fluctuations in demand have a greater impact on capacity (Slack, et al., 2009: 248). In the Starbucks process, demand fulfilment is the production of the drink ordered by the customer; thus the supply side of the equation is concerned with having correct amounts of the needed ingredients – coffee, various flavourings and other ingredients, milk products, cups and lids, and the proper equipment – readily at hand for the baristas to be able to make the drinks. Because Starbucks focuses on speed of service – the average process time from when the customer enters the store until he receives his order is about three minutes, with drinks requiring between 20 and 90 seconds to produce (Gray, 2005) – the demand aspect of capacity management is more important. Those figures provide a basis for calculating the operation’s capacity. The average time to produce a drink is 55 seconds, thus in one hour, one barista can prepare 65 drinks, meaning that the demand capacity of the operation is 65 orders per hour. One challenge that Starbucks has not overlooked, however, is that it is a mixed manufacturing and service operation (Jiang, 2009: 184); the process produces a product, while at the same time it produces a service, the intangible “Starbucks Experience.” As one company representative explained, the challenge is “to move quickly without being rushed” and spoiling the customers’ experience (Gray, 2005). Thus a demand-supply mismatch for Starbucks could be understood thus: Demand in excess of 65 orders/hour capacity. Inability to meet excess demand while maintaining consistent service standards (friendly greeting, obtain customer’s name, limit entry-to-order receipt time to three minutes or less). Starbucks’ approach to managing demand fluctuation is a combination of absorbing demand and adjusting output to meet demand, or put another way, combining a level capacity and a demand-chasing format for operations management (Slack, et al., 2009: 261). Part of the level capacity can be managed from the outset by properly assessing the location of the store and the customer population; a store in a business district, for example, will have a more uniform customer demographic with predictable demand fluctuations than a store located near a busy rail station or in a shopping mall (Charalambous, 2008: 151). Beyond that, Starbucks absorbs demand to a point simply by making customers queue up and wait, something that most customers seem willing to do (Debo & Veeraraghavan, 2009). Once that solution causes customers to wait longer than the three minute average entry-to-order receipt time, however, then the store must switch to adjusting to the demand. One way in which this is done is by employing a “floater,” an employee that can help speed up the process by taking customer orders while they are in the queue, manning another register or drink-making station, or preventing interruptions to production by transferring supplies from the stock room to the barista’s station (Gray, 2005). The obvious drawback to this is that costs are added for having an additional worker, and the normal process map in Figure 2 does not account for the floater position, requiring the employees and the manager to exercise a bit of coordination. However, if higher demand can be satisfactorily met, the costs and extra effort are justified. Lean Principles in Starbucks’ Operations Starbucks’ process is an excellent example of a lean synchronisation approach to operations, and of course the clearest example is the “made to order” process for producing customers’ drinks (Slack, et al., 2009: 350-351). As noted earlier, the customisation of orders is integrated with a standardised process and product platform; customers’ demand for a personally-customised product is still satisfied, even though their choices are actually limited to just a few basic components – coffee, flavouring, milk product (Gottfredson & Aspinall, 2005: 4). To better illustrate how Starbucks applies lean principles, the operation is described in terms of the Seven Wastes in the table below (Bhasin & Burcher, 2006: 58): Waste Description How Starbucks Eliminates It Overproduction Producing too much or too soon. Pull strategy – orders made when requested. Waiting Long periods of inactivity. Streamlined, standardised process reduces customer waiting; minimal staffing reduces employee down-time. Transportation Excessive movement. Customers retrieve their own orders from the counter. Supplies for production are kept close at hand. Inappropriate Processing Wrong or inefficient processes or tools. Processes are standardised, and unnecessary steps eliminated. For example, in 2007 Starbucks began pre-grinding coffee and shipping it to stores in sealed packages, to eliminate the extra step of grinding in the stores (Goldhar, Brownstein & Berg, 2007: 4). Inventory Excessive or insufficient storage of needed supplies. Only small amounts of needed supplies are kept in the production area, and replenished from stores as needed. Unnecessary Motions Poor workplace organisation causing more motions than needed to produce and deliver product. Process flow and work area is designed to prevent workers from having to cross paths; cash register and customer order delivery areas are kept separated. Defects Wrong or poor quality product. Orders are made using consistent format and repeated to ensure accuracy. One of Starbucks’ strongest advantages is the manner in which the company overcomes involvement barriers to build a lean organisational culture; many of the ‘basic working practises’ of lean manufacturing developed by Japanese companies such as Toyota are reflected in Starbucks’ human resources management standards (Koehn, 2001: 16-17; Slack, et al., 2009: 357-358): Discipline: Processes are highly standardised. Flexibility: All employees in the store are cross-trained in every position in the process. Development of personnel: Employees are extensively trained, and encouraged to stay on with the company and move to higher positions. Quality of working life: Employees are offered a stock option plan and health benefits to encourage a sense of being true stakeholders in the company. Creativity: Starbucks provides various forums and other platforms to encourage employees to share product or operations ideas, or discuss problems amongst themselves and with company management. Even though the focus of the analysis is on operations management, the mixed nature of Starbucks – as a provider of both a product and a service – means that employee development is a critical consideration. Lovelock and Wirtz (2010: 280) point out several factors that make employees a critical process component: Employees in service firms are core parts of the product: The employee is the most visible element of the process, delivers the service and product, and significantly determines product and service quality. Represent the firm: From the customer perspective, the barista behind the cash register is Starbucks. Likewise, the employees are the personification of the Starbucks brand. Affects sales: Employees are important for generating sales and add-on sales; in the context of process management, this has a significant impact on demand. Determine productivity: In the Starbucks process, the speed and efficiency with which it can be carried out is entirely dependent on the employees. In that context, Starbucks’ employees can be considered in the same way as other resources when assessing supply-demand imbalances. Too few employees, too many employees, or employees who are not properly trained or not properly following procedures in effect cause an imbalance on the supply side of the equation that must be corrected. Fortunately for Starbucks, this does not seem generally to be the case. Application of Just-in-Time (JIT) Principles In a very basic sense, JIT principles are applied at Starbucks, even though the paradigm is more applicable in purely manufacturing operations rather than mainly service operations such as Starbucks. In terms of the visible process of producing customer orders, JIT is reflected in the fact that orders are made as they are requested – a pull strategy – and that only enough ingredients are kept on hand at the barista station to meet expected demand in a given period of time. JIT principles are better reflected in the processes by which Starbucks supplies its stores; the maximum supply of coffee delivered to a store is seven days, to maintain the freshness of the product (Koehn, 2001). This allows Starbucks to reduce its costs for storage and delivery as well (Jiang, 2009: 187). Conclusion & Recommendations Starbucks uses its effective operations process to gain a considerable competitive advantage. While this begins with its overall strategic approach to entering and establishing a dominant presence in markets (Koehn, 2001; Daniels, 2003), it is the visible process that creates the customised product on which the “Starbucks Experience” is based. The evidence of the success of the company’s approach is clear from the rapid growth it has experienced, and in the consistent growth in customer traffic (Zhang, 2006; Paryani, 2011). In that view, it is difficult to find flaws in the Starbucks approach to operations management and suggest improvements. However, a couple recommendations could be made to help the company sustain its competitive advantage: Focus more on the “experience” as a product in the process management context: One of the problems that is mentioned in several articles (Koehn, 2001; Gray, 2005; Zhang, 2006) is the difficult balance Starbucks has struggled to maintain between too much standardisation ‘de-personalising’ the experience and maintaining the character as a “third place” that gives the company its competitive advantage; this has been a particular problem as Starbucks has expanded globally beyond its familiar American cultural environment. Just as Starbucks’ operations managers have focused closely on process steps to streamline operations, the interface between the employees and store environment and the customers must also be closely analysed in terms of what customers demand of the service product. A case in point is the switch from grinding coffee in the stores to supplying pre-ground coffee; while it saved time, the “ambience” of having the smell of fresh-ground coffee permeating the store was lost (Goldhar, et al., 2007). That aroma might be a legitimate product for which demand is not being met. Make the “floater” a regular part of the process: Along those lines, the “floater” who assists different parts of the process in particularly busy times can be used to improve the provision of the service product by speeding up the process generally, and by providing customers with “something to do” while they are waiting in the queue by taking pre-orders and suggesting additional sales (Debo & Veeraraghavan, 2009). This will relieve some of the pressure of demand exceeding capacity at times. References Bhasin, S., and Burcher, P. (2006) “Lean viewed as a philosophy”. Journal of Manufacturing Technology Management, 17(1): 56-72. Charalambous, M. (2008) “An Evaluation and Proposals for the Success Factors and Process of Innovation”. The Cyprus Journal of Sciences, 6: 149-155. Daniels, C. (2003) “Mr. Coffee”. Fortune, 147(7): 139-140. Debo, L. and Veeraraghavan, S. (2009) “Models of Herding Behavior in Operations Management”. In: S. Netessine and C. Tang (eds.), Consumer-Driven Demand and Operations Management Models, 81-114. New York: Springer. Gill, M.G. (2007) How Starbucks Saved My Life: A Son of Privilege Learns to Live Like Everyone Else. New York: Penguin. Glover, K. (2008) “McDonald's 'McCafe' Picks Up Steam, Challenging Starbucks”. BNET Food, 10 December 2008. Available from: http://industry.bnet.com/food/1000320/mcdonalds-mccafe-picks-up-steam-challenging-starbucks/. Glover, K. (2009) “More Bad News for Starbucks as McCafe Moves in For the Kill”. BNET Food, 20 April 2009. Available from: http://industry.bnet.com/food/1000608/more-bad-news-for-starbucks-as-mccafe-moves-in-for-the-kill/. Goldhar, J., Braunstein, Y., and Berg, D. (2007) “Services Innovation in the 21st Century: It All Begins with Defining Services vs. Products and Factory vs. Service Operations”. UC Berkeley-Tekes Service Innovation Conference, 26-28 April 2007. Available from: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.98.5915&rep=rep1&type=pdf. Gottfredson, M., and Aspinall, K. (2005) “Innovation Versus Complexity: What Is Too Much of a Good Thing?” Harvard Business Review, November 2005: 1-9. Gray, S. (2005) “Coffee on the Double”. The Wall Street Journal, 12 April 2005, p. B1. Available from: http://online.wsj.com/article/0,,SB111325107832003816,00.html. “HR Company Profile: Starbucks Corporation”. (2003) hrSpectrum, September-October 2003: 2. Jiang, X. (2009) “The Relationship between Manufacturing and Service Provision in Operations Management”. International Journal of Business and Management, 4(3): 183-189. Koehn, N.F. (2001) “Howard Schultz and Starbucks Coffee Company”. 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