Individual Analysis - Case Study Example

Student Name: Tutor: Title: Individual Case Assignment Course: Individual Case Assignment Introduction Starbucks coffee was an idea by college students and developed by Howard Schultz turned into a profitable multimillion company. The steady growth and expansion of Starbucks coffee stores was disrupted in 2007 when the share prices of the company dropped by 75%. The task to turn around company was given to Schultz at the request of the Board of Directors. Schultz had stepped down in 2000. This report discusses the strategic issues and problems that bedeviled the growth and expansion Starbucks leading to plummeting shares prices and shrinking market share. Increased completion, poor strategy in new market penetration, spawning of imitators and waning of Starbucks global brand have been discussed as some of the challenges that affected the company. A comprehensive analysis of the Starbucks situation has been done under the Analysis and Evaluation part while an action plan is outlined in the recommendation section. The conclusions echoes the important points discussed in this case. Identification of strategic issues and problems Change of management of Starbucks in 2000 following the stepping down of Howard Schultz seemed to have affected its overall strategy in the global and domestic market. The performance of Starbucks’ deteriorated by 2007 with whereby same-store sales and margins both were plummeting. Some of the evident challenges that Starbucks’ faced was increasing competition, market saturation, and constrained consumer expenditure laid the stage for dramatic fall in share price (Bouthers, Brouthers & Werner, 2003). The board was forced to request Schultz to return as CEO in 2008. For about two years everything seemed to be revitalized at the company with share prices rising to $62. The share price had dropped by 75% in the previous two years. Massive job cuts were one of the strategies employed by Schultz to cut down on operational costs. The salaries of top management were slashed by a huge percentage with Schultz himself taking a salary pay cut from $1.2 Million to $10,000. Such actions did not increase the market share or sales by Starbucks (Orlitzky, 2008). Well thought strategies were needed to ensure that the company went back to its initial performance before the stepping down of Schultz as CEO in 2000. Schultz conceded in the course of his restructuring that growth and success can be a cover up for many mistakes; it is not a strategy but a tactic. Starbucks had to close stores which had been opened barely 18 months ago. Spawning of imitators who affected market share and profit margins of the company was another challenge that Starbucks’ faced. The market in the United States could be segmented into specialty and ordinary coffee. Specialty coffee houses had previously been a characteristic of cities in the United States particularly those in the west and east coasts for a long time. This growth propelled many imitators into the market. Independent coffee houses and chains sprung up. Many catering establishments in the United States like fast foods chains and restaurants began to serve coffee in their menus. The outlets sought to compete with Starbucks directly through addition of premium coffee drinks on the menus (Carroll & Buchholtz, 2008). McDonald’s launched a premium coffee and added more cafes to its burger restaurants both in Europe and North America. Dunkin’ and Burger King also entered the up market in coffee offering. The website by McDonalds implicitly pointed out coffee from Starbucks’ as snobbish and overpriced. Starbucks also faced increased global competition from other countries hence forcing it to withdraw from the Australian market. The Australian market had a highly sophisticated market of coffee educated and developed by Italian, Middle Eastern, and southern European immigrants. Starbucks in the European continent was faced with well-developed markets with having high standards of preparation as well as strong local preferences. However, the withdrawal from the Australian market was cowardly and an indication of poor new market penetration strategy. With the right strategy, Starbucks would have penetrated the Australian market. Starbucks as a global brand was waning and sounded like an old cliché. Consumer needed revitalization of Starbucks products in the market (Teece, 2007). Get used to being at the top led managers to relax instead of looking at changing consumer trends in the market. Product like extension and re-launching of upgraded products would have assisted in making Starbuck brand felt in the market amidst the growing competition. Analysis and Evaluation Starbucks re-emphasized its core-values eliminated core-products, reversed store expansion, and focused on customer service and quality of coffee in an effort to turnaround its performance in the market. Such tactics indicated the desperate situation that Starbucks’ was caught in. Using Porter’s Five Forces to analyze the situation at Starbucks a clear picture of what is happening can be discussed. These five forces include threat of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among competitors. Structural Determinants of Competition SUPPLIER POWER Climatic change affect the produce of coffee beans Other brewers get cheap beans and offer affordable coffee The power of suppliers is moderate in the coffee beans market THREAT OF ENTRY There high level of new entrants both in the domestic and global market. Other players in the US market include Tim Hortons, Caribou Coffee, Tully’s Coffee, Dunn Bros, Port City Java, and Coffee Beanery. Imitators prang up in the coffee market INDUSTRY RIVALRY There is high competition with entry of big players like McDonalds. Dunkin’ Donuts and Burger King. More restaurants have added coffee on their menus. SUBSTITUTE COMPETITION Other beverages like fruit juice, tea and porridge as easy substitutes for coffee. BUYER POWER Coffee buyers have an option of buying cheap coffee from independent stores and other competitors In the global market like Australia customers are price sensitive. McDonalds’ offered coffee at a discounted price. New entrants into an industry sector leads to desire and new capacity to again market share putting pressure on costs, prices, and the rate invested required for competition Porter (2008) explains that when new entrants diversify from other markets they lead to leveraging of prevailing capabilities as well as cash flows for shaking up competition. Threat of new entrants in Starbucks’ case is very high. Many imitators in the form of independent coffee houses, as well as chains sprang up serving coffee as part of its menu of beverages and food. McDonald’s launched premium coffee and an implicitly offensive marketing message on its website portrayed Starbucks as snobbish and overpriced. Dunkin’ Donuts and Burger King went into the up market in their coffee offering. Both Dunkin’ Donuts and McDonald unfairly targeted Starbucks in their offerings of coffee. Consequently threat to new entrants in the coffee market was at a high level both from small independent coffee houses and big companies like McDonald’s. Globally Starbucks even more different competition from country to country. Starbucks was forced to withdraw from the Australian market. Power of suppliers is another force that affects competition. When suppliers are powerful they have more value and they can charge high prices hence limiting services or quality, and shifting the costs to other industry partners. Powerful suppliers deny profitability other industry payers who inflate prices to cover costs. Power of suppliers of coffee beans is moderate although climate change affects production of coffee beans resulting in increased prices due to high demand for coffee beans. The power of Buyers is also important. Customers who are powerful capture more value through forcing prices downwards, demanding more services or better quality and playing industry participants against each other. Powerful buyers are price sensitive and exert pressure leading to price reduction (Folta & O’ Brien, 2004). Increased competition lead to price wars and hence customers choosing affordable coffee offerings. Buyers’ power is high since they have variety suppliers of coffee brewers to choose from hence leading to reduction in prices. Threats of substitutes also affect industry players. A substitute performs similar or the same function as a particular product in another way. The threat to substitution can be indirect or downstream. Threat of substitutes is ripe in the Starbucks case. Coffee is not the only beverage in the market and customers can take other beverages like tea. Starbucks was forced to start a fruit juice segment just to diversify and provide a substitute to coffee. Specialty coffee market witnessed a home-brewed coffee. Italian-style sales espresso makers grew rapidly from 2000. Nestle Nespresso subsidiary came up with a single-serve coffee pod system. Rivalry among competitors takes many forms like new product launch, service improvement, and price discounting. Increased competition leads to reduced profitability in the industry. The intensity of competition can vary from one industry to another (Porter, 2008). McDonalds, Dunkin’ Donuts and Burger King are some of the competitors in the US market apart from other independent coffee chains and houses. McDonald’s portrayed Starbucks as overpriced and snobbish. Other players in the industry like McDonald were offering coffee at a reduced price as compared to Starbucks. Coffee market players in Australia provided high quality coffee and there was a strong local preference by the customers leading to Starbucks to back away from this market. Recommendations The launch of new type of instant coffee in February 2009 was a good move that provided variety for its customers and a move to expand. This was an effort to differentiate and expand the company’s product in order to counter competition from imitators. The price of the instant coffee was as low as $2.95 per three individual servings. Starbucks used the right strategy to enter the India market that has a huge middle class with high spending. This strategy involved a joint venture with Tata Group. Direct investment in Australian market faced high competition from a dynamic market that had strong local preference. Starbucks’ did not have the advantage of cost leadership in such markers and its best to use joint venture to enter unfamiliar markets. Partnering with local players helps the company to understand the dynamics in the market and how to cope in the wake of increased competition (Janssen, 2004). Starbucks instead of pulling out of the Australian market they should have penetrated the market by using local players who understand the market dynamics. Following strong local preference by customers it was not good to have Starbucks enter the market as a direct foreign investment. The company should have applied game theory in its recovery strategy. The theory entails looking forward and reasoning backwards. While Starbucks wanted to keep hold on its market share, the management must emphasize on the previous attributes that made coffee from Starbucks superior and upgrade some of its coffee category. According to game theory for every action there is a reaction hence Starbucks should have anticipated the springing up of imitators and cushioned itself against such a move. Starbucks is a market leader particularly in the use and should have used its dominant strategy to keep off unnecessary competition even from small players in the industry (Höhn, 2009). Moreover, game theory emphasizes the need of in-depth knowledge of the competitors in order to understand what measures to put in place to fight the competition. Some of the outlets in the market were barely 18months old before they were closed down due increased operational costs and stiff competition from downstream and up market in the industry. It would be prudent to franchise some of the shops to local players instead of choosing to close them down completely (Werther & Chandler, 2010). Franchising and licensing could allow local partners to run the coffee stores and have the profits enhanced Starbucks growth. The massive job cuts were unprecedented and may have negatively hurt the reputation of the company. The workers laid off would have discouraged other customers from buying coffee from Starbucks. The decision to use espresso machines in preparation of most of its coffee led to loss of human touch in the preparation of coffee (Orlitzky, 2008). Engagement in social media and the trips by Schultz around the world were positive move by the company, but more promotional and marketing should have be done to enhance sells and reassure disillusioned customers about Starbucks’ quality. Increased advertising in audio-visual and other print media was important to ensure that the Starbucks positioning as a market leader was maintained or developed further. New market entry is important for expansion but should be done careful after thorough market research to discover strengths and weaknesses of the new market. Careful planning and market scanning have to be done to reduce risk of entering a new market. Starbucks had to withdraw from the Australian market owing to the stiff competition and the strong local preference by consumers. Early market research or scanning would have revealed these challenges and ensured that the right strategy to enter the market has been adopted (Lymbersky, 2008). Geographically diversification is done to reduce risk but it lead to losses if a company does not understand the local market. A lasting strategic solution has to be found in order to avoid dependence on a single personality for growth and stability of Starbucks. Schultz will not lead Starbucks forever and his policies have to be institutionalized to ensure that they are permanent. Conclusion Starbucks story reads like a miracle demonstrating American entrepreneurship. Intensive market research and scanning is important before new market entrants. The waning brand of Starbucks’ product had to be rejuvenated and its products in some markets repositioned. Direct entry into the Australian market led to a quick withdrawal amidst stiff competition from established local brands led by the Italians. The return of Schultz to the management of Starbucks led to many chances targeting growth and expansion to keep the market share. Increased competition from the global and US market required the use of market specific strategies for the company. Launching of instant coffee and closing down some of the stores globally were some of the steps employed Schultz to turnaround the company. Starbucks’ market share can be expanded with continuous innovation and thorough planning prior to entering new markets. References Bouthers, K., Brouthers, L., & Werner, S., 2003, Transaction cost-enhanced entry mode choices and firm performance, Strategic Management Journal, 24 (12): 1239-1248. Carroll, A., & Buchholtz, A., 2008, Business and Society: Ethics and Stakeholder Management, Cengage Learning, New York. Folta, T.B., & O’ Brien, J.P., 2004, Entry in the presence of dueling options, Strategic Management Journal, 25 (2): 121-138. Höhn, M.I., 2009, Relational Supply Contracts: Optimal Concessions in Return Policies for Continuous Quality Improvements, Springer, New Mexico. Janssen, R.M., 2004, On durable goods markets with entry and adverse selection, Canadian Journal of Economics 37 (3): 552-589 Lymbersky, C., 2008, Market Entry Strategies, Management Laboratory Press, Hamburg. Porters, M.E., 2008, Five competitive forces that shape strategy, Harvard Review: 79-93. Orlitzky, M., 2008, Oxford hand book of corporate social responsibility, Oxford University Press, New York. Teece, D.J., 2007, Explaining dynamic capabilities: The nature and micro-foundations of (sustainable) enterprise performance, Strategic Management Journal 28: 1319-1350. Werther, W.B., & Chandler, D., 2010, Strategic Corporate Social Responsibility: Stakeholders in a Global Environment, SAGE, London. Read More