Management of Information Technology: How to Improve Starbucks with IT - Case Study Example

Management of Information Technology: How to improve Starbucks with IT BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS EXECUTIVE SUMMARY Introduction........................................................................................................... 2. Five Forces Analysis.............................................................................................. 3. Porter’s Value Chain............................................................................................. 4. Recommendations for where IT can bring the most significant advantages.... 5. Conclusion............................................................................................................... References EXECUTIVE SUMMARY Starbucks operates in a market environment where competitive rivalry is intensive and where differentiation of product offerings characterises market position. Starbucks is currently challenged by major competitors such as Costa and Pret-a-Manger that are each positioned differently depending on service conceptions and emphasis placed on satisfying customers. Starbucks currently utilises a premiumisation strategy, built on years of brand establishment and the ability of the business to express quality and human capital talent to make this business stand out from competition. In a market environment where changing consumer attitudes and lifestyles dictate the level of competitive responsiveness from key market players in this industry, the company must remain focused on the marketing function as the primary competitive advantages. Research into Starbucks identified many opportunities for where information technology could provide competitive advantages. These opportunities include linking technology to the marketing and branding functions, to improve human resources efficiency and training, and by opening lines of real-time communication with internal staff members and external supply chain partners. It is recommended that the business establish IT systems in areas of brand development, procurement, and for human capital development to achieve better market presence and brand reputation. How to improve Starbucks with IT 1. Introduction Starbucks is a global coffee company that has, in recent years, diversified its business strategies, procurement models, and market positioning in order to gain competitive advantages. Starbucks currently maintains 793 stores in the United Kingdom selling coffee beans, hot and cold beverages, snacks and sandwiches, as well as books, music, and a variety of Starbucks branded merchandise offerings (Starbucks 2012). The company, in 2011, boasted revenues of approximately 14 billion USD, a significant accomplishment for a business that operates in very saturated competitive marketplaces and offers products that have reached their maturity against the product life cycle model. 2. Five Forces Analysis In the United Kingdom, Starbucks maintains very powerful competition with such major coffee houses as Costa and Pret-a-Manger. Costa, the second largest coffee house in the world, currently holds 37.6 percent of market share in this industry in the UK, backed by the notable cash and capital resources of its parent company Whitbread Plc. These main competitors continue to use their strong brand positioning to maintain consumer loyalty in key markets, representing significant competitive threats to Starbucks. Under Porter’s Five Forces model, there are several threats to maintaining current market leader position for this mature business model. The most significant threat in this market is the degree of rivalry that exists between main competitors, associated with brand personality and associated promotions to gain consumer loyalty. Starbucks operates in an oligopoly, a market characterised by only a handful of major competitors and where competitive promotions and branding strategies influence competitive responses (Boyes and Melvin 2005). In this market, switching costs for consumers are very low, thus the intensity of competitive promotions increases as each competitor in the oligopoly attempts to seize market share. This is a market with very slow growth potential and where operations impose significant fixed costs on the business model (e.g. facilities management and labour). In this market, Starbucks has established a pricing structure built on premiumization positioning which allows the company to charge higher-than-industry-average pricing that is associated with years of developed brand strategies associated with exclusivity and quality. “By creating market-based assets perceivable by the consumer, firms are able to nurture perceived brand value and consumer brand equity” (Abimbola 2001, p.98). This is the nature of this market: To establish a well-respected brand conception translating both tangible and intangible service dimensions to improve the long-term brand equity of the firm in a competitive market where differentiation occurs through brand building activities. The degree to which competitors use conceptions from the marketing mix, including place marketing, product and service emphasis, and promotion determine the degree of rivalry in this market. Furthermore, this is a market that is characterised by considerable buying power of consumers. Price-sensitive buyers have considerable opportunities to defect to competition, selecting the lower-cost Costa to satisfy budget-minded consumption needs. Consumers in this market possess an unspoken, but recognisable backward integration threat that always represents a threat of competitive defection. Komninos (2002) iterates that it is often difficult to determine when a product or service has reached its decline stage, at least until revenues begin to reflect sales declines. To reduce some of the buyer power in this market, Starbucks diversifies its offerings to include a variety of non-coffee products and non-food merchandise to extend the product and service life cycle. This diversification strategy is backed by powerful branding strategies to ensure that Starbucks maintains a fresh and flexible brand personality. Brand personality is about translating intangibles of the business model to reflect brand sincerity, excitement, and competence, three dimensions necessary to gain consumer loyalty (Aaker 1996). The level of buying power held by consumers is minimised by creating perceptions in key target markets that Starbucks is an evolutionary and consumer-centric brand where substitute products lack the aforementioned sincerity and competence found in Starbucks’ business model. There are legitimate threats of substitutes in this market, such as choosing tea rather than coffee from lesser competitors in local markets. Generally, in most industries with much competitive rivalry, threat of substitutes impacts pricing competition (Porter 2011). However, Starbucks transcends the typical competitive responses where there are threats of substitutes by justifying higher pricing structures based on decades of premiumization positioning in this market. Fortunately, the capital requirements and talent needed to establish a similar competitive business model by new entrants are significant, thus representing minimal risk to Starbucks. Small, independent business owners can establish similar coffee houses, however the proprietary know-how associated with franchising and brand development are significant to maintain any credible competitive forces in this mature industry. Starbucks maintains many proprietary products, such as gourmet and organic products procured through customised partnerships and alliances with international agriculturalists that are not easily replicated; and are already supported by a strong promotional emphasis on brand. Replicating the positive outcomes of years of differentiation and customer relationship management is not easily achievable without significant capital investment into the brand development process. Fortunately for Starbucks, suppliers do not maintain significant power in this market. Starbucks has spent years establishing an innovative and proprietary supply chain that includes partnerships with many independent growers, with many supported by Starbucks right from the earliest stages of agricultural development. Starbucks maintains a very positive reputation for corporate social responsibility efforts associated with procurement and urban development focus in developing nations that supply many coffee products to the business. This allows Starbucks to control costs in the supply chain associated with certain procured products and also significantly increases the switching costs for many of the business’ international vendors. Suppliers are usually weak when the majority of procured products are commodities (Porter 2011), which represents the majority of Starbucks’ total procurement needs to maintain store operations. 3. Porter’s Value Chain Holding costs of inventory are considerable concerns for Starbucks. Such costs include utilities, taxations, warehousing space costs, and inventory management costs for the products procured by the business. These costs are largely unavoidable unless a firm establishes a piggybacked distribution strategy to avoid elongated holding costs (Heizer and Render 2004). Thus, inbound logistics are a major operational concern for the business in a sales environment where holding costs occur at the micro-level, with each facility offering products and services impacted by fluctuating consumer patronage volumes and consumer demand ratios. Enterprise resource planning technologies are utilised at Starbucks to minimise excessive inventory holding costs and streamline procurement to meet with known demand patterns in high-performing and low-performing facilities. Further, the development of strategic alliances with suppliers assists in better managing the supply chain and direct involvement of supply partners in new product development leads to better competitive advantages (Copacino 1996). Starbucks excels in streamlining the supply chain to better manage inbound logistics by exploiting the capabilities and resources of diverse international suppliers to be more flexible and adaptable to fluctuating procurement volumes. Fortunately, Starbucks does not have to concern itself with production other than transforming commodity coffee products into a consumable finished product using in-house baristas and other human capital talent. Operational systems are in place throughout the retail network that include high-cost and high-efficiency coffee machines supported by regular taste testing and prototyping talent internally. Research did not uncover any notable deficiencies in operational strategy that could be enhanced through the implementation of information technologies due to the nature of the operational model by which Starbucks manages its business model. Marketing and sales, however, are significant value drivers for Starbucks that can be enhanced through information technology and associated support talent in IT. As previously identified, Starbucks is heavily reliant on branding and competitive differentiation in a rather homogenous market. Consumer attitudes in this industry heavily influence demand, as well as economic conditions that can lead to price sensitivity in key target markets. Therefore, in order to respond according to consumer lifestyle changes and socio-cultural needs, Starbucks must invest heavily in market research to uncover what is driving consumption behaviours in the real-time sales environment. These activities can be enhanced using information technology by establishing a database with demographic information that can, quantitatively, be translated into a variety of useful market research imperatives. In order to provide products and services that will be perceived as relevant and exclusive they must be aligned with consumer attitudes and perceptions about quality and pricing. Because Starbucks’ success is highly dependent on consumer beliefs about the integrity of the Starbucks brand, the business can further enhance its competitive position using social media and Internet technologies to improve its market position. In today’s business world, companies are moving to a concept known as movement marketing, which is essentially a switch from focus on product and service to a values-based promotional strategy. “You have to stop telling consumers what you make and, instead, tell consumers what you believe in” (Goodson 2011, p.1). Starbucks maintains many unique opportunities to utilise social media technologies to establish real-time relationships with loyal and non-loyal consumers to express the brand-related values of the business to improve demand. Effective customer relationship management in marketing includes the technologies that will be employed to retain and attract consumer markets (Buttle 2008). CRM solutions using information technology aids in understanding the specific likes and dislikes of desired markets and then using this data gathered to alter operational strategy (or marketing strategy) to provide consumers with more important perceptions of total value. Social media is an excellent tool by which Starbucks can express its movement marketing and values-based principles to differentiate using non-product emphasis. Service dimensions at Starbucks that enhance the business’ reputation on the market include provision of positive customer support from competent internal staff. Research did not uncover any dimensions of service that require adaptation or correction as the operational model related to service provision is quite simplistic. Adequate training is provided to ensure a top quality experience (Starbucks 2012) that translates into a variety of human capital advantages. Support activities associated with human resources, however, can benefit from implementation of information technologies utilising the HRIS (human resource information system) consisting of a variety of self-service functions to enhance the employee experience and maintain an adequate database of human resource efforts and objectives. Since quality and speed of service are critical competitive factors that will determine market longevity, establishment of information technology systems that support training and development will provide better human capital advantages to Starbucks over competition. It is critical that those holding tacit knowledge in the business (experts in one fundamental area of knowledge) come together to support innovations and new prototypes for enhanced product offerings. Companies that absolutely need innovation to remain viable on the market must support an open communications system (Stover 2004). Information technologies, in this case, would provide Starbucks with considerable advantages by facilitating communication across borders by tacit knowledge-holders in research and development (i.e. video conferencing or other communications technologies) to inspire communities of practice and effective knowledge transfer to support innovative business developments. Procurement is one of the most complex and dynamic aspects of Starbucks, justified by premiumization strategies used to position the business as a quality and expert leader in this industry. Only top quality, Starbucks-branded coffee products (such as high-cost Arabica beans) differentiate the business from competitors such as Costa which leads to better revenue gains under the premium pricing models used at the business. Use of Enterprise Resource Planning software, such as SAP, allow the business to incorporate multiple areas of operations linked with procurement needs to maximise supply efficiencies. By aligning real-time demand and sales volumes with expected procurement needs, the business avoids the aforementioned costs associated with holding inventories and achieves a leaner procurement system that is adaptable to changing market trends. 4. Recommendations for where IT can bring the most significant advantages Having assessed the market conditions and internal philosophy of Starbucks, there are key areas where information technology can bring the firm the most advantages. It was established through the Five Forces Analysis that there are limited risks of new market entry by new competitors, however much reliance on the attitudes and lifestyle conditions of consumer markets to attain more market share and profitability. Thus, sustaining currently-loyal consumers is critical to maintaining market longevity. Starbucks should be utilising social media in higher volumes in order to more effectively reach consumers in an environment that is relevant to their lifestyle needs. Social media provides low cost opportunities to use incentive-based marketing (e.g. coupons and discounts) for loyal customers through the establishment of a loyalty program network. Consumers who interact with the brand in the virtual environment can explore the many innovations being offered by the brand which translates into effective movement marketing outcomes. This IT-supported forum gives the company much more visibility and allows the business to translate its values into meaningful conversation with important revenue-building markets. Starbucks operates in a market with little opportunity for rapid growth and where products offered are largely homogenized, but differentiated through promotional strategy. Thus, establishment of relevant communications considered vital to satisfying consumer needs are critical to success. Starbucks should be taking advantage of this very low-cost technology opportunity to express more emphasis on values and principles and presenting these constructs in an environment favourable to many consumer markets. Since product and pricing in the marketing mix are not effective differentiation tools for Starbucks, the depth and quality of communications in a more interactive forum gives Starbucks opportunities to make the brand personality of the business stand out without significant cost burdens. Information technology used in communications would also provide Starbucks with considerable competitive advantages, allowing internal executive management to establish better customer relationship management with the business to business sales market. Routine adjustments occurring along the supply chain to meet with innovation expectations and new service conceptions require changes to the procurement model. Starbucks should be incorporating more real-time communication with international vendors, involving them more strategically in new product conceptions and service model developments. As identified by Copacino (1996), such alliances are critical to establishment of a streamlined and efficient procurement model. By utilising teleconferencing technologies, as only one example, the business can remove costs of travel from the operations budget and also integrate suppliers into the business development strategies of the firm. Such relationships in the B2B market are critical for establishment of cooperative supply strategies and expressing trust in supply partners that translates into more willingness to be adaptable and flexible to the changing needs of Starbucks. As illustrated by the analysis, Starbucks has many competitive threats and risks associated with low switching costs for consumers. Even though Starbucks can out-manoeuvre some of these risks by using marketing as a competitive tool so that consumers perceive costs to quality by switching to competition or choosing substitute products, the consumer-centric business model demands adaptability in brand positioning to attain a market leader position. Starbucks should establish an IT infrastructure that allows for compilation and analyses of socio-demographic marketing data to achieve greater gains in customer satisfaction. Results of surveys, questionnaires, and statistical market findings related to basic market demographics will give the business a better template by which to gauge success in promotion and advertising. Data mining of consumer data maintains multiple opportunities for competitive advantage by illustrating which markets are under-performing or whether the current service model being utilised is deemed sufficient by consumers. This is critical data for an industry that is driven by changing consumer preferences and where adaptability is a key dynamic for gaining market share. 5. Conclusion The method by which Starbucks would gain competitive advantages through information technology is quite unique from other retailers in different industries. Where other industries consider IT to be more effective in areas of procurement and for cost savings in operations, Starbucks can utilise information technology to continue to provide support for its strong, premium brand that currently maintains much brand equity. These are the critical success dynamics for Starbucks that cannot negate the influence of consumers with much buying power and opportunities for substitutes that leads to brand defection. By aligning information technology to existing service strategy and branding emphasis, it will build efficiencies in establishment of customer relationship management that translates into long-term brand loyalty and opportunities to expand revenues through brand equity establishment. Information technology provides multiple opportunities for competitive advantages so long as the technologies and systems are applied to the marketing and logistics functions that translates into better external market knowledge and achievement of cost savings gains in supply and procurement. References Aaker, D. (1996). Measuring brand equity across products and markets, California Management Review, 38(Spring), pp.102-120. Abimbola, T. (2001). Branding as a competitive strategy for demand management in SMEs, Journal of Research in Marketing and Entrepreneurship, 3(2), pp.97-106. Boyes, W. and Melvin, M. (2005). Economics, 5th ed. Cengage Learning. Buttle, F. (2008). Customer Relationship Management: Concepts and Technologies. Oxford: Butterworth-Heinemann. Copacino, W.C. (1996). Seven supply chain principles, TraBc Management, 35(1), p.60. Goodson, S. (2011). Is brand loyalty the core to Apple’s success?, Forbes Magazine. [online] Available at: http://www.forbes.com/sites/marketshare/2011/11/27/is-brand-loyalty-the-core-to-apples-success-2/ (accessed 8 December 2012). Heizer, J. and Render, B. (2004). Operations Management Flexible Version Package, 7th ed. Prentice Hall. Komninos, I. (2002). Product life cycle management, Urban and Regional Innovation Research Unit. [online] Available at: http://www.urenio.org/tools/en/Product_Life_Cycle_Management.pdf (accessed 8 December 2012). Porter, M. (2011). Five Forces Analysis – A model for industry analysis. [online] Available at: http://www.quickmba.com/strategy/porter.shtml (accessed 7 December 2012). Starbucks. (2012). Investor overview – Starbucks investor relations. [online] Available at: http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-irhome (accessed 7 December 2012). Stover, M. (2004). Making tacit knowledge explicit, Reference Services Review, 32(2), pp.164-173. Read More