Company Strategic Analysis - Essay Example

0 Introduction Starbucks Corporation, founded in 1985, is an international coffee and coffeehouse chain based in Seattle, Washington, United s. Each store is selling drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, snacks and items such as mugs and coffee beans. Moreover, Starbucks Company markets books, music, and films through its Entertainment division and Hear Music brand. Its vision is to “establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow” and its missions statement are categorized separately towards its coffee, partners, customers, stores, neighborhood and shareholders. Starbucks employed approximately 142,000 employees around the world including 111,000 people from US only, according to the statistics up to 27th September, 2009. (Annual Report, 2009) 2.0 Company Analysis Starbucks is in the Coffeehouse or Coffee Shop Industry. Sometimes, it is said to be in Leisure or Specialty Eatery Industry. The company owned an ROI of 22.80% and net income of 945.60 million USD in 2009. (www.marketwatch.com) Starbucks was ranked as Fortune magazine’s #1 most innovative company in the food services industry in 2001. (Fortune Magazine) The major competitors of Starbucks in the industry are Caribou Coffee, Tully’s, Coffee Bean & Tea Leaf and Java Centrale. (Student Resources) Starbucks is also facing the intense competition of coffee manufacturers such as Kraft and Procter & Gamble and distributers like Nestle. Moreover, the brewing battle with McDonald’s has been intensified in recent years. 2.1 External Environment Starbucks’ external environment can be learned better by analyzing its socioeconomic or macro environment covering political, economical, sociological and technological factors as well as opportunities and threats. Political Because of the growing tensions between the United States and the rest of the world, especially in the Middle East and Southeast Asia, the business environment has been becoming increasingly volatile. In July 2002, Arab students from five states initiated a boycott of American goods and service to the alleged close relationships between the US and Israel. (Fisk, 2002) That movement targeted mainly to Starbucks, Burger King, Coca-Cola and Estee Lauder. Moreover, Starbucks is facing class litigation against it. Economical Unfavorable economic situations in the market can negatively affect consumer spending. (Hill, 2008) Starbucks faced criticism from Non-governmental Organizations urging the company to acquire certified coffee bean to make sure that those coffee beans were grown and marketed under certain economic and social conditions. Trading in countries which were in economic recession such as Switzerland, Germany and Japan made Starbucks experienced sales and revenue declines. Social Social factors can also create opportunities or threats for Starbucks. For example, a regional or global health pandemic, an outbreak of infective diseases, could seriously have effects on Starbucks business. (Annual Report, 2009) But, the company’s willingness to make sure its effects on the environment to be as positive as possible can help in building a good name. Technological The company is dependent on its information technology system to perform functions of operational and management level tasks including supply chain, point-of-sale and other transactions. If failure of its system may occur, there are a lot of delays and losses in sales and business process which will finally drive to reduce the efficiency of the company. The technological advancements such as SAP systems offer Starbucks opportunities in managing and controlling its business processes while an abrupt technological shift or security attacks may play an adverse effect on its information system. Opportunities Opportunities are conditions in the external environment through which a company can get benefits to become more profitable. (Hill, 2008) For Starbucks, new products and services can be retailed in their cafes as Fair Trade products. There are opportunities to expand its global operations for new markets for coffee such as India and Pacific Rim nations. To overcome restrictions and reduce costs in implementing new stores in international markets, Starbucks can think of joint ventures in which each party shares the risks. Starbucks’ licensing strategy could offer it new streams of revenues. According to National Coffee Association of USA, there are trends for increasing coffee consumers, for example, 17% of the adult population consumed a gourmet beverage on a daily basis in 2008 and 14% in 2007. (ncausa.org) Starbucks’ CD-burning service with Hewlett Packard and links with book clubs can bring it more opportunities to make its services more innovative and to have more product lines. Customer loyalty programs such as Starbucks card and free re-fills for free music downloads may strengthen its customer loyalty percentage and attract new customers. Threats Threats are situations in the external environment that can threaten integrity and profitability of a business. (Hill, 2008) Raw material cost is rising and so the company has to spend more for its cost of coffee, labor and dairy products. Similarly, labor costs have been increasing along with higher health care and employees’ basic compensation costs. There can be lower customer traffic or average value per transaction due to the entry of new competitors or increasing competition of existing competitors. As an international company operating in different parts of the world, Starbucks has to face foreign currency exchange rate fluctuations. Moreover, it needs to comply with local laws which may hinder it from expanding or controlling employees or other resources effectively. Currently, Starbucks is posing more competitors and the possible saturation of US coffee market. 2.2 Internal Environment In building and sustaining a competitive advantage, it’s vital to find out a company’s strengths and weaknesses to provide superior efficiency, quality, innovations or customer responsiveness. Strengths Strengths are assets that increase profitability and lead to superior performance of a business. (Hill, 2008) Starbucks is the market leader in specialty coffee retailer industry and one of Fortune Magazine’s best companies or top 100 companies to work for in 2011. (www.money.cnn.com)It possesses strong ethical values, mission statements and economies of scale. The company also owns a strong brand image value representing the quality of its product and experience acquired from its excellent customer service known as “The Starbucks Experience”. Starbucks owns numerous copyrights for its properties such as coffee packaging, in-store graphics and training tools and it will prevent its products from being copied. (Annual Report, 2009) Weaknesses Weaknesses are liabilities that lead to decrease profitability but they can point out the necessities to be done to achieve improvement. (Hill, 2008) Although Starbucks was well known for its innovations, they may falter over time and newcomers can adapt to its creative ideas. Starbucks’ high dependency on its US segment’s financial performance may issue problems if US market becomes less profitable. Moreover, its premium prices will meet challenges with lower price competitors like McDonalds or Costa Coffee. 3.0 Strategic Options Competitive strategies, a set of related and effective actions, are important factors in building competitive advantage for a company to achieve superior performance compared to competitors. (Hill, 2008) Product A product is what a company provides for its customers, whether it is tangible, such as coffee, or intangible like hospitable services offered by Starbucks’ staffs. Starbucks provides 30 varieties products in terms of specialized coffee, beverages, premium teas, cakes, salads and even coffee-related accessories like mugs. Tazo Tea, spicy black tea, Espresso, Starbucks Latte, Caramel Macchiatto, Mocha, Frappuccino and Cappuccino are famous Starbucks’ products. Each Starbucks store has its own product mix depending on the size of the store and its location. In March 2009, Starbucks introduced its Ready Brew instant coffee packets into market. Price “Price refers to the amount of money charged for a product or service and profits go to those who charge the right price”. (McCarthy and Schrank, 2009) The pricing policy of Starbucks is reflected by price of coffee beans, milk products and other raw materials. Starbucks products come with premium prices for the company pursues differentiation strategy which focuses on achieving superior quality and customer responsiveness. Place Place refers to how a product or service gets to its customers and it is also called “distribution strategy” which concerns selling directly or indirectly via wholesalers and retailers. (McCarthy and Schrank, 2009) As of January 2, 2011, there are 17,009 Starbucks stores in total in over 50 countries including 8,870 company-owned stores and 8,139 licensed stores. (Annual Report, 2009) The pricing strategy is to open coffee shops in highly traffic areas. Promotion Promotion is a marketing strategy comprising of advertising, selling, public relations, trade shows, direct mail, and other communication techniques. It is intended to change beliefs or increase awareness and purchase intent of potential buyers. (McCarthy and Schrank, 2009) My Starbucks reward program offers members to get a free drink after making 15 purchases. Starbucks Card also allows patrons to pay for their purchase and earn rewards. 4.0 Strategic Challenges Learning the company’s external and internal environment as well as marketing mix helps to find out Starbucks’ advantages to keep overcoming the disadvantages. It can also assist to answer the questions challenging Starbucks’ strategies, such as: 1) Should Starbucks try to discover a solution to overcome the US coffee market which is gradually saturated? 2) Should the company proceed to expand in Asia market? 3) Should Starbucks strive to boost the coffee drinkers’ awareness and value of high quality coffee? 4) Should they continue to pursue the existing non-aggressive marketing techniques, i.e., word-of-mouth? These questions are directly concerned with Starbucks’ corporate level strategy which allows it to identify its businesses or industries, value creation activities and method to enter or leave businesses or industries. Inertia and prior strategic commitments play a major role in keeping companies away from changing their strategies to adapt with progressing situations. (Hill, 2008) 4.1 The Result or Solution For the first strategic question, Starbucks determined to expand into more product lines in addition to coffee by pursuing unrelated and related diversification strategies by diversifying into music retail and food industry—light foods. Wolk (2008) claims that Starbucks as one of the most powerful music retailers in the market. Starbucks performed partnerships with i-Tune and Hear Music is a brand name of Starbucks’ retail music concept. For food industry, Starbucks diversified its food products as sandwiches, ice-cream, salads and popular hot breakfasts. It even partnered with PepsiCo for bottling, distributing and selling Starbucks Frappuccino and Kraft food for distributing its coffee in grocery stores to make its coffee readily available. (Larson, 2008) To reduce the risks of relying on US market only, Starbucks is increasingly dependent on its international operating segments in order to achieve its growth targets. Coffee consumption in developing countries is projected to grow from 1.7 million Tonnes in 1998 - 2000 to 1.9 million Tonnes in 2010, at an annual rate of 1.3 percent. (FAO, 2010) Starbucks’ first expansion in Asia was in Japan by licensing in 1995. Then, it opened coffee houses in Singapore, China, Taiwan, India, Thailand, and Malaysia consecutively. For the third question, Starbucks applies the focus differentiation strategy consistently, and adjusts the marketing and advertising strategies with this strategy. It always position as a product quality and industry segment leader. (Larson, 2009) Moreover, it positions itself correctly by defining how people should perceive its products and services without changing the products. Starbucks positioned its coffee by changing people’s perceptions towards coffee’s role in everyday life. Traditionally, the formal coffee for breakfast was “cuppa Joe” and not a “latte” but Starbucks’ specialty coffees have became all-day beverages by changing their customers’ perceptions. (McCarthy and Schrank, 2009) Finally, although Starbucks never pursue aggressive marketing techniques, its marketing strategy, word of mouth is quite effective. The company neglected special promotion programs and, instead, it pursue word of mouth marketing by refocusing on the customer experience in Coffee houses, new products and store decorative elements, as well as training tools for its store partners to provide customers a superior experience consistently. (Annual Report, 2009) So, Starbucks’ custom of marketing has proved its success today and it should be followed in future. In addition to those strategies, Starbucks balances the growth rate of global stores and try to meet store-level unit target in a particular market. Via multi-channel advertising and marketing campaign, Starbucks try to distribute its message directly to its consumers and partners to make it an open organization. Finally, Starbucks proceeds to keep a solid financial foundation, without having any short term debt outstanding at the end of fiscal 2009 and it possessed cash and liquid investments totaling more than $650 million. (Annual Report, 2009) Starbucks results of operations consisting of ongoing activities to improve the current state of the business. According to 2009 Annual Report, “consolidated operating income was $562 million for fiscal 2009 compared to $504 million in fiscal 2008, and operating margin improved to 5.7% compared to 4.9% in fiscal 2008. “ 5.0 Recommendations Starbucks is a great firm and one of the most successful companies in the world thanks to its ambitious entrepreneur Howard Schultz’s simple strategy, “connecting links between treating employees with dignity and respect and producing a good product and service”. This strategy works well and it should be strengthened by building a sustainable competitive advantage and its environmental leadership strategy. Starbucks should spend more on its Research and Development to maintain its quality and to continue its innovativeness through new tastes and flavors. The company already spent 7.2 million USD on R&D in 2008. (Annual Report, 2009) The uniqueness of its tastes achieved from thorough research can lower the possibility of being imitated by generic groups. Benchmarking, which is comparing a company’s performance against that of competitors and its own former performance, and learning consumer behaviors regularly can help Starbucks to be successful in the long run. According to Hanna and Wozniak (2001), the study of consumer behaviors discovers the way individuals choose, purchase, use and dispose of goods and services and so it will provide more opportunities for Starbucks to produce goods that will meet its targeted customers. References: Fisk, R, 2002, ‘Starbucks the target of Arab boycott for its growing links to Israel’, The Independent, 14 June 2002, viewed 1 May, 2011, http://www.independent.co.uk/news/world/middle-east/starbucks-the-target-of-arab-boycott-for-its-growing-links-to-israel-749289.html FAO, 2010, ‘Coffee’, Economic and Social Development Department, viewed 5 May, 2011, http://www.fao.org/docrep/006/y5143e/y5143e0v.htm Flight, G, 2006, ‘Grinding Out Success Next to Starbucks’, Business 2.0 Magazine, viewed 2 May, 2011, http://money.cnn.com/magazines/business2/business2_archive/2006/10/01/8387114/index.htm Fortune Magazine 2011, ‘100 Best Companies to Work For’, viewed 1 May, 2011, http://money.cnn.com/magazines/fortune/bestcompanies/2011/index.html Hanna, N & Wozniak, R, 2001, ‘Consumer Behavior: An Applied Approach’, Prenhall, New Jersey. Hill, Charles W.L &Jones, G.R, 2008, ‘Strategic Management Theory: An Integrated Approach’, 8th Edition Larson, R, 2009, ‘Marketing Strategy and Alliances Analysis of Starbucks Corporation’, Faculty Publications and Presentations, viewed 4 May, 2011, http://digitalcommons.liberty.edu/busi_fac_pubs/10 Marketwatch.com, ‘Starbucks Corp’, viewed May 2, 2011, http://www.marketwatch.com/investing/stock/sbux/profile McCarthy, K.D & Schrank, J, 2009, ‘Marketing 4Ps: The Consumer Age’ National Coffee Association USA, 2008, viewed May 2, 2011, http://www.ncausa.org/i4a/pages/index.cfm?pageid=201 Starbucks Annual Report 2009, viewed 1 May, 2011, http://www.starbucks.com/assets/ssp-g-p-full-report.pdf Starbucks website www.starbucks.com Student Resources, ‘Starbucks Corporation’, viewed 30 April, 2011, http://www.mhhe.com/business/management/thompson/11e/case/starbucks-2.html Wolk, D, 2008, ‘Something’s brewing’. Billboard Read More