Starbucks Strategy - Essay Example

?Starbucks strategy I. Introduction A business strategy describes how a business seeks to succeed against its competitors (MacMillan and Tampoe 2000,p. 170). Consistent with this, a business strategy must provide answers to four concerns (MacMillan and Tampoe 2000, p. 170). Firstly, a business strategy must define the scope of the business. Secondly, the business strategy must be cognizant of customers’ current and future needs within the scope of the business. Thirdly, the business strategy must define the unique capabilities that will give the business the competitive advantage in its business area. Finally or fourth, the business strategy must define the broad terms that will put the business on a secured foothold in its area of business. Each distinct business endeavour must have its own business strategy so that if a business covers several business areas then it must have several business strategies (MacMillan and Tampoe 2000, p. 171). Although there is a tendency for a business strategy to be lengthy, a business strategy document must be short enough so that the document can be read and understood in one sitting (MacMillan and Tampoe 2000, p. 17). The content of business strategy can cover strategic intent, the principal findings of a strategic assessment, the strategic choices that have been made and the supporting rationale, a statement of goals and objectives, and an outline of the strategic initiatives (Macmillan and Tampoe 2000, p. 17). There are several business strategy formulation frameworks that businesses use in their business practice as well as employ in articulating their business strategy. Based on the preponderance in the literature, it seems that two of the most popular ones are Michael Porter’s Five Forces Strategy Formulation System and the Blue Ocean Strategy Formulation System of W. Chan Kim and Renee Mauborgne. Both approaches have a sizeable following and appear to be a contrast of strategy formulation framework for business. According to the management consultancy group of Dagmar Reckiles, Porter’s five forces strategy calls for moderating the rivalry among firms, reducing the possible threats from new entrants, emaciating customer bargaining power, overcoming threats from substitutes, and reducing customer bargaining power (p. 1). Kim and Mauborgne (2005, p. 106) describes the blue ocean strategy as the strategy that seeks a market where there are no competitors known as “blue oceans”. According to Kim and Mauborgne (2005, p. 106), a blue ocean strategy implies being uncontested in the market, irrelevance of competition, creation and capture of new demand, value for money, and aligning firm attention towards a focus on differentiation and lower costs. The Kim and Mauborgne perspective utilize the analogy of a blue ocean that is calm and without competition that can make the blue ocean very bloody or red. Porter’s Five Forces Analysis and Kim and Mauborgne’s blue ocean strategy do not exhaust the possible variations of available business strategy formulation frameworks but the two business strategy formulation frameworks probably state the spectrum on which the various business strategy formulation frameworks can be found. II. Starbucks through time and today We trace the history of growth of Starbucks Corporation based on its postings through its official website at www.starbucks.com and official reports that the corporation gave to government agencies. Starbucks Corporation started from a single narrow-front store selling coffee beans in Seattle’s Pike Place Market (Starbucks Corporation 2010a). The corporate name originated from the Moby Dick novel and was intended to evoke the romance of the high seas and the early coffee traders (Starbucks Corporation 2010a). The current Starbucks Chairman, President, and Chief Executive Officer had walked into a Starbucks store in 1981, fell in love with Starbucks coffee, and joined the company a year after. However, in 1983, Howard Schultz travelled to Italy, was exposed to Italian coffee bars, and has been described by the company to dream of bringing the Italian coffeehouse tradition into Starbucks. Schultz stared his own Giornale coffeehouses and returned in 1987 to purchase Starbucks in association with other investors. We derive the business strategies adopted by Starbucks Corporation from its Annual Corporate Reports starting from 1999, the earliest annual report available in the corporation’s official website. This work will review Starbuck’s corporate strategy and forward recommendations based on that review. In 1999, Starbucks Corporation had 2,500 stores in 13 countries with 37,000 employees serving more than 10 million customers a week (Starbucks Corporation, 1999a). By 1999, Starbucks Corporation has already expanded into New Zealand, Beijing, Malaysia, South Korea, and Kuwait despite the Asian Crisis that started in mid-1997. In the United Kingdom, Starbucks Corporation acquired several stores of the Seattle Coffee Company and converted them into Starbucks (Starbucks Corporation, 1999a). The year 1999 saw the introduction of bottled Frappucino and Starbucks Ice Cream into the market. Starbucks also became visible in 8,500 grocery stores resulting form a licensing agreement with Kraft Corporation (Starbucks Corporation 1999a). As early as 1999, Starbucks had a website through which it had intended to be accessible to customers. With the intention of enhancing customers’ coffee experience in the Starbucks stores, Starbucks Corporation acquired Hear Music. Hear Music expanded customers’ coffee experience through in-store programming, new music offerings, and life performances. As of 3 October 1999, Starbucks Corporation’s total assets were $1.25 billion of which $961 million was attributable to shareholders’ equity (Starbucks Corporation 1999b). Net revenue was $1.68 billion during the year. In 2000, Starbucks were at 17 countries from 13 a year earlier. The company has grown into 3,500 locations serving 12 million customers per week. At that time, Starbucks had been studying customers’ favourite drinks and the customs and habits associated with how they take coffee in each of the country Starbucks is in (Starbucks Corporation 2000a). In doing these, Starbucks tapped the cooperation and help of their baristas to shoot pictures and video or audio record how customers take their beverages, especially coffee. Starbucks discovered, for example, that their customers come in suits or in their jogging wear or take their coffee after a long bike (Starbucks 2000a). Coffee preferences also differ across countries (Starbucks Corporation 2000a). In the United Kingdom, for example, the favourite is a tall latte (Starbucks Corporation, 2000a). In Seattle, United States, the customers come with their laptops (Starbucks 2000a). It was not reflected in the 2000 annual report but it is reasonable to surmise that the data were factored in the Starbucks business concept. Starbucks total assets in 2000 were $1.49 billion of which $1.148 billion was attributable to shareholder’s equity at total net revenue of $2.169 billion (Starbucks Corporation 2000b). In 2001, Starbucks was strengthening its links with its coffee suppliers and coffee farmers (Starbucks 2001a). The company invited farmers around the world to submit nominations for the best coffees and in so doing addressed two concerns: rapport with suppliers and better identification and control of supplies. As a result, hundreds of coffee beans samples arrived from Costa Rica, Kenya, Ethiopia, Panama, Guatemala, Sumatra, Vietnam, Hawaii, and Mexico into the tasting rooms of Starbucks (Starbucks 2001a). It is safe to assume that Starbucks Corporation studied the coffees and supply sourcing strategies were formulated based on the coffee samples submitted to them (and after verification, most probably). As a public relation gesture, Starbucks also donated $15,000 towards the health programs of countries in which Starbucks coffee suppliers can be found. The donations were made even at a difficult time because during the year, Seattle was rocked by a 6.8 earthquake. Nevertheless, in addition to the donations, Starbucks also collected $2.6 million to support victims of the earthquake (Starbucks Corporation 2001a). Further, even with a difficult time, the 2001 Annul Report described an opening of 3,900 locations in North America and more than 1,000 locations in 23 countries (Starbucks Corporation 2001a). The Annual Report even openly stated that Starbucks experienced phenomenal growth even when times are difficult (Starbucks Corporation 2001a). Moreover, where other companies may fear to thread, Starbucks Corporation allowed itself to be subjected to Fair Trade certification during the year even when the prices of coffee has been down (Starbucks Corporation 2001a). This business strategy clearly demonstrates a business organisation that seeks to connect deep with the community and with customers, many of them probably students and professionals, with a good sense of justice and fairness. Despite Starbucks’ efforts to project itself as a fair trader and as a company imbued with a good sense of corporate responsibility and citizenship, total assets grew to $ 1.851 billion in 2001 with $1.375 billion of the assets attributable to shareholders’ equity and at net revenues of $2.648 billion (Starbucks Corporation 2001b). The said figures are way above the 2000 level. By 2002, Starbucks manifested in its Annual Report a deep understanding of her customers through a rendition of the behaviour, customs, and habits of her customers in Spain. The Annual Report depicted the Spanish customers’ demand, tastes, activities, and customs associated with food. Although the example is Spanish, it is easy to see Starbuck Corporation’s intent to grasp the same for all her customers in every part of the globe. Through its Annual Report, Starbucks Corporation highlighted the importance of associating their product with the “spirit of the company” or the “spirit of life” (Starbucks Corporation 2002a). Starbucks Corporation has also declared that it is her policy to source out 1% of the world’s best beans to provide the best coffees and reported that the sampling requires samples of about 150,000 cups (which may or may not be fully true, of course). The 2002 Annual Report expressed that there is a cloud of uncertainty in the economy worldwide but pointed out that sales growth was about 5% annually. Further, Starbucks Corporation had claimed that they already in 30 countries and serve around 20 million customers per week (2002a). The 2002 Annual Report declared that its goal is to 10,000 stores in 60 countries by the end of 2005. Starbucks Corporation has also made a strong claim that it has been improving the lives of people in countries where the company is getting its coffees and teas that it has entered into a program to reward coffee suppliers that meet quality standards and sound environmental practices (Starbucks Corporation 2002a). During this year, Starbucks Corporation (2002a) reported a total asset of $ 2.292 billion, with $1.726 billion attributable to shareholder’s equity and with net revenue at $2.792 billion. Fast forward to 2007, Starbucks became a corporation of 15,000 stores in 43 countries employing 170,000 people who they call partners (Starbucks Corporation 2007). The company reported that sales, assets, and all positive figures have been improving since 2002. In the fiscal year, the company reported $9.b billion in revenues and net earning of $673 million (Starbucks Corporation 2007) or $0.87 per share given common stock price of $28.29 as of 30 September 20007. Starbucks Corporation (2007) emphasized that its core business has been establishing a connection between the customers and the company through the coffee experience. Further, Starbucks Corporation (2007) reiterated that it has always sought to be the “third place” that customers would be in other than their homes and offices. Nevertheless, the company expressed customer traffic has been slower in the US market despites the corporation’s successes. In 2008, Starbucks Company continued to express a difficult environment but reiterated that the company’s fundamentals have remained strong: 17,000 stores in 49 countries and 160,000 employees whom the company call “partners” (Starbucks Corporation 2008). However, total assets are lower at $5.672 billion wherein around $2.49 billion can be attributed to shareholder’s equity. Net revenues, however, are higher at $10.383 billion (Starbucks Corporation 2008). In 2009, despite the continuing world crisis, Starbucks (2009) reported that the company was beginning to see traffic in the Starbucks stores. The company reported that it is in more than 7,000 stores in 50 countries. It appears that the number of stores are lower than 2008 but the number of countries covered increased from 49 to 50. Based on the latest postings in the official website of the company this 2010, Starbucks Corporation has 15,000 stores corporation in 50 countries today or the same figure as the 2009 figure with regard to countries but the number of stores are lower than the 2008 figures (Starbucks Corporation 2010a, Starbucks Corporation 2009). The company has proclaimed itself as a premier roaster and retailer of specialty coffee in the world. The company associates its name and products with connection with people. It projects its store as a place for conversation, as a community, and as a third place that is between home and work. Figures on audited total assets, net revenues, and shareholders’ equity for 2010 are still unavailable. In January 2011, online media reported that Starbucks dropped its name and the word “coffee” from its logo (BBC 2011). The online media reported that the move reflects the intent of Starbucks to expand from its core business of coffee. However, another way of interpreting the move is that Starbucks would most likely enter into partnerships and alliances, the same way that it had been doing since 1999. For example, one possibility is for a company engaged in pizza business to offer Starbucks products. This point however is not reflected in the news and this writer is merely identifying a possibility. BBC (2011) reported that Starbucks is considering to sell beer and wine. It is also the opinion of this writer that Starbucks may one day emphasize on teas and fruit juices instead. Meanwhile, other than our discussion above, it is important to stress that in the Starbucks official website, great pains are exerted to project that Starbucks is practicing ethical business, corporate responsibility, fair trader, and is committed to a healthy environment. The company has been emphasizing concern for the community and has consistently projected itself as deeply interested in connecting with the community. III. Analysis: The Starbucks strategy Based on the foregoing, we can say that Starbucks used the elements of Porters Five Forces Strategy as well as Kim and Mauborgne’s Blue Ocean Strategy. Starbucks used Porter’s Five Forces Strategy because Starbucks has a long track record of reducing if not eliminating competition from rivals similar to what Starbucks had done in the acquisition of the Seattle Coffee Company in 1999 in the United Kingdom. One manifestation of its attempts towards vertical integration consistent with the Porter Strategy is Starbuck’s acquisition of Hear Music in 1999 so customers can associate their coffee experience at Starbucks with fine music. Starbucks made sure it has studied the supply side of coffee production and establish links with hundreds of suppliers in 2001 in order to reduce suppliers’ bargaining power with the company in 2001. On the other hand, Starbucks used Kim and Mauborgne’s Blue Ocean Strategy because it has associated her products with ethical practice of business, corporate responsibility and community connection. Perhaps, no other company in the coffee business has invested so much in projecting herself as a responsible corporate citizen than Starbucks. Its practice of good business ethics and fair trade are consistent with its attempt to deepen its connection with the community: it is difficult for a company to earn a favourable image in the community if it is seen as an exploiter, wrecker of the environment and the like. At the same time, there are several features of the Starbucks business strategy that cannot be associated with neither Porter’s Five Forces Business Strategy Formulation System nor Kim and Mauborgne’s Blue Ocean Strategy. One of such strategies is the use of acquisition. Companies that used to be competitors like the Seattle Coffee Company were purchased and converted into Starbucks stores. Another strategy is the company’s use of business alliances that it has described in several of its annual reports. Still another strategy is its deep study of consumers and the input of the studies on its business concepts such as on the types of food to serve and its tolerance for people using laptops in their stores. IV. Conclusion Porter’s Five Forces Strategy has been popularized for probably a few decades now while Kim and Mauborgne’s Blue Ocean Strategy became popular only recently. In contrast, Starbucks Corporation was established in 1971. It seems plausible that through the years, Starbucks Corporation acquired influences from the advocates of both perspectives and internalized both the Five Forces Strategy System and the Blue Ocean Strategy System into its operations. At the same time, it is also possible that Starbucks Corporation was simply pragmatic in its operations and used a business strategy that made it possible for the company to survive and make a mark in the business world. It is also plausible that that business strategy that it has used was a product of its own business practice in the streets and not a product of acquisition form learning the best from the academic world. Whether Starbucks Corporation acquired some of the best from the academic world or whether it has produced its own strategy formulation system, we can also credit Starbucks Corporation for employing a strategy that may be unique or strategies that can be be found neither on Porter’s system nor on the system of Kim and Mauborgne. Based on the corporate history narrated in the corporate website, the key external condition that contributed to the success of Starbucks, especially prior to the crisis, is its effective monopolistic hold on the market through appropriate branding of itself as the “third” place or home of the consumers between the home and the office or school. Meanwhile, the distinct feature of its internal environment is the attention that its personnel devote to consumer needs and lifestyle that are inputed in product branding. A key component of the corporate strategy involves to the creation of a Starbucks image of a good and responsible corporate citizen with good business practices and ethics. In addition to these strategy components, Starbucks utilized business alliances and strengthened links with its suppliers. These represent the company’ attempt to manage suppliers’ bargaining power and industry rivalry. The strategy being implemented by Starbucks are sound and viable and was instrumental for her growth from one store in 1971 to about 5,000 stores today. Lately, there are signs of stress because of the economic crisis but overall the company is doing well. Thus, the key recommendation of this work is for Starbucks to simply continue the strategies that it has done in the past. There is even no need to change direction nor the company logo but doing the redirection and the company logo so will not be detrimental to Starbucks as long as the company strengthens its links with its consumers and suppliers and strengthens its image of a good corporate citizen. References BBC, 2011 (6 January). Starbucks drops name and the word coffee from logo. Available from: http://www.bbc.co.uk/news/business-12125440 [Accessed 7 January 2011]. Kim, W. and Mauborgne, R., 2005. Blue ocean strategy: From theory to practice. California Management Review, 47 (3), 105-121. MacMillan, H. and Tampoe, M., 2000. Strategic management: Process, content, and implementation. Oxford University Press. Reckiles, D., 2001. Porter’s 5 forces. A handout. Reckiles Management. Starbucks Corporation, 1999a. Annual Report, Narrative Part. Available from: http://phx.corporate-ir.net/preview/phoenix.zhtml?c=99518&p=irol-reportsAnnual [Accessed 7 January 2011]. Starbucks Corporation, 1999b. 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