Starbucks, the Global Coffeemaker - Assignment Example

? STARBUCKS, THE GLOBAL COFFEEMAKER Table of Contents Table of contents ………………………………………………………………… 2 List of Tables – ………………………………………………………………….. 3 INTRODUCTION ………………………………………………………. 4 2. TASK A …………………………………………………. ……………... 5 2.1 PESTEL ANALYSIS …………………………………………………. 5 2.1.1 Political…………………………………………………………….. 5 2.1.2 Economic ………………………………………………………….. 5 2.1.3 Sociological ……………………………………………………….. 5 2.1.4 Technological ……………………………………………………… 6 2.1.5 Legal ………………………………………………………………. 6 2.2 Porter’s Five Forces Analysis ……………………………………………. 7 2.2.1 Threat to Entry – Low because of high barriers …………………... 7 2.2.2 Threat to Substitutes – High substitutes posed by McDonald’s, Panera, Dunkin’ Donuts……………………………………………7 2.2.3 Buyer Power – high due to phenomenon of love for coffee ……….. 8 2.2.4 Supplier Power – high due to demand …………………………….. 8 2.2.5 Competitive – high due to product alternatives offered by firms ….8 2.3 Critical Success Factors (CSF) ………………………………………….. 9 2.4 Opportunities and Threats ………………………………………………. 9 3. Task B …………………………………………………………………….. 9 3.1 Value Chain ……………………………………………………………… 9 3.2 Value Network …………………………………………………………… 10 3.3 Competitive Advantage ………………………………………………….. 11 4. Task C – Strategic Fit Analysis …………………………………………… 12 4.1 Strategic Direction ………………………………………………………. 12 4.2 Strategic Fit ……………………………………………………………… 12 References …………………………………………………………………….. 15 List of Tables Critical Success Facgtors 1. Introduction This paper will provide a strategic analysis on the popular brand Starbucks within the business environment of the United States. The focus is the U.S. and International segments which are responsible for company-operated and licensed stores. Also included in the classification of International segment are food service accounts stationed in Canada and the U.K. When Starbucks started its humble beginning, Starbucks founder Howard Shultz said that they wanted to change how people lived their lives. The company has transformed gourmet coffee into a primary food product along with a new American coffee shop (Thompson and Arsel, 2004, p. 631). This innovative company manufactures and directly sells coffee and tea, but its specialties are beverages from roasted whole bean coffee and tea. It operates owned- and leased-stores in many parts of the United States, the United Kingdom and Europe, and the whole world. (MarketWatch, 2012) Starbucks’ model of cafe is unique but it has tapped the coffee lovers’ segment, which is not actually a segment per se since everyone loves coffee. The company has penetrated major developed markets (Canada, China, Japan, Britain, and continental Europe, and even countries in South East Asia). It has conquered coffee lovers and Rome. Starbucks suffered some setbacks when the founder and CEO Howard Shultz stepped down in 2000 to act as chairman. Shares went down and the company was about to collapse had it not for the comeback of Shultz who had to start the company all over again, in Schultz’s words “own the mistakes” (Harvard Business Review, 2004) and make Starbucks the number one “coffee shop” once again. 2. Task A- Analysis of Starbucks’ external environment 2.1 PESTEL Analysis – Political, economic, technological and legal factors are key drivers for change in a firm or industry. 2.1.1 Political aspects The U.S. slowed down export quotas for coffee to keep the price stable. Quotas on coffee affected the price and may eventually affect the price of Starbucks coffee which will then be passed down to consumers. Production of coffee beans is affected by taxation laws. It was reported that in Tanzania, the Minister of Finance made moves to rationalize taxation on agricultural products like coffee beans in order to boost production. (Heavey, 2003) 2.1.2 Economic aspects Money supply: The financial crisis exacerbated the situation when Howard Shultz, CEO and founder, left the reigns of management to become Chairman. It added problems to the management crisis that was going on in Starbucks. Money was more needed when Shultz retook management to rejuvenate management and eventually Starbucks. The 180,000-strong employee force needed an effective management who knew Starbucks from the beginning. And Schultz needed money to keep the ball rolling. 2.1.3 Sociological aspects Starbucks believe in valuing people – the employees and the customers. Howard Shultz revived the company by enhancing the integrity of their assets – the company values, culture and guiding principles, which gained the trust and confidence of the people and the community in general. What is remarkable with the Starbucks team under Shultz is that they understand their customers. Shultz said that they stay “small” even if they are big; meaning keeping your feet on the ground by understanding the needs and wants of your customers. They work to exceed the expectations of the people and their employees. (Harvard Business Review, 2004) 2.1.4 Technological aspects Social media and digital media have helped Starbucks where it is today. But during its trying times, when Howard Shultz was not the CEO, conservationists and bloggers used technology and the Internet to capitalize on Starbucks’ weaknesses. Conservation groups attacked Starbucks in what they called draining water supply to clean Starbucks’ equipment. Schultz countered that the report was exaggerated. But that’s past, according to Shultz. Starbucks has used social media in attaining its goals. Bloggers are now talking about the company and they spread the good news about Starbucks through the power of the Internet. (Harvard Business Review, 2004) 2.1.5 Legal aspects Starbucks terminated Kraft Foods Global, Inc. in managing, marketing, advertising and promoting some Starbucks products like Seattle’s Best Coffee and other packaged coffees in grocery and warehouse club stores to many parts of the United States. Kraft violated the Terms of their Agreement, according to Starbucks, and both parties went through arbitration proceedings. Kraft denied any violation and so it went to court seeking an injunction to stop Starbucks from terminating Kraft. The U.S. District Court for the Southern District of New York and the Court of Appeals denied Kraft’s request. At present, Starbucks is not involved in any legal proceedings involving its business. (United States Securities and Exchange Commission, 2011) ` 2.2 Micro-environment – Porter’s 5 forces 2.2.1 Threat to Entry – considered low because of high barriers to entry This is considered low and entrants are not a threat. But Starbucks has strong competitors like McDonald’s, Panera, and Dunkin’ Donuts. McDonald’s launched its McCafe strategy where prices for premium specialty coffee beverages are lower than Starbucks beverages. 2.2.2 Threat of Substitutes - McDonald’s is a strong competitor after it launched hundreds of stores and prominent locations and with its new strategy, the drive-thru windows. Delivering value and convenience to customers allows McDonald’s to get a big part of the competition. Panera is strong and attractive to the breakfast and lunch customers. Starbucks cannot get past Panera because it is weak in this segment, the food service. Dunkin’ Donuts also uses food as a strong threat to Starbucks. In populated areas in New York or Boston, Dunkin’ Donuts have stores right across where there are Starbucks stores. It becomes a battle between coffee and coffee with a donut. Whichever is delicious is what people choose. (Starbucks fights back against a growing number of competitors, 2012) Other substitutes include tea, juices, soft drinks and various energy drinks. There are also pubs and restaurants in which people can spend their time relaxing and being entertained as they while away the time. (Starbucks Porter’s five forces analysis, 2012) Aside from the threat posed by McDonald’s, in Japan they have the Dutour Coffee, which came ahead of Starbucks. It is said that there are Doutor Coffee shops in every train station. Doutor is also a threat to McDonald’s because they sell cheap hotdogs and takeout sandwiches. (Lewis, 2003) 2.2.3 Buyer Power – high due to growing phenomenon of love for coffee Customers have high bargaining power considering that there are options open to them and offers are coming from competitors. 2.2.4 Supplier Power – high supplier power due to demand of coffee beans Bargaining power for suppliers is high because of the big demand of this special kind of coffee beans which grow only in some geographical areas. 2.2.5 Competitive Rivalry – high due to product alternatives offered by competitors Starbucks’ competitors are major players in the industry, like McDonald’s, Costa, Caribou Coffee, Panera, and Dunkin Donuts. There are also many small coffee shops and cafes proliferating in local areas or communities. 2.3 Critical success factors (CSF) These are factors that may lead to success or failure of Starbucks. Table 1 Critical success factor Comment Customer loyalty The Starbucks’ strategy has been effective in instilling in the minds of consumers to make their coffee shops an alternative between home and work. People who experience pressure at work find a refreshing break and take a zip of Starbucks hot and fresh-brewed coffee in a cozy atmosphere. (Pham-Gia, 2008, p. 9) Starbucks value people According to Howard Behar, a former senior executive at Starbucks, leadership principles count in the company. First, they value honesty – telling the truth and being truthful to one’s self and doing it to others, is most important. If you avoid the truth, it makes a lot of problems and you and the company loses. At Starbucks, Behar says, they value people and money comes last. People’s welfare must be ahead of profits, because it is people who plant the coffee, choose the best coffee, ship that coffee to its purported destination, roast the coffee to its desired taste, and brew and serve and enjoy it. ‘People’ is the aim and purpose of coffee sales. Starbucks value employees and customers. (Behar and Goldstein, 2010) The ability to attract different sectors Even if Starbucks has established loyalty with a particular segment, it has attracted the young and old who have learned to love their brand of coffee and the ambiance created by the store design. Character and values of Starbucks workforce When Schultz was reappointed as CEO in 2008 to regain Starbucks’ leadership in the industry, he had to remind Starbucks people of their character and values which made Starbucks different. He had to bring 10,000 store managers to New Orleans, retrain and make them aware of the community’s needs. Shultz and the managers started their conference with community service in New Orleans. They contributed about 54,000 volunteer hours and invested about $1,000,000 in painting, landscaping, constructing playgrounds and making New Orleans beautiful once again. In his new thrust for the company, Shultz focused on supply chain efficiencies and waste reduction, catapulting the company’s customer satisfaction to new levels. (Harvard Business Review, 2004) Task B – Analysis of Starbucks strategic capabilities 3.1 Value Chain In finding the right opportunities and acquiring strength to create capabilities, the manager should be able to determine the current situations in the external environment. Internal strengths should be measured on how it can cope with the external environment. There are countless opportunities and threats occurring within the competitive environment and from the PESTEL factors. By identifying these opportunities and threats, the marketing manager can maximize or enhance the organisation’s capabilities so that it can overcome the threats. Market opportunities may come any time. When Howard Shultz founded the company in 1983, he had no idea that it would become big and trigger an industry. The idea just developed in his mind when he made a trip to Milan, Italy, and when he returned to the U.S. he wanted to develop a chain of American coffee shops. (Ferrell and Hartline, 2011, p. 130) Schultz also discovered that there were only 200 existing coffeehouses in the United States at the time Starbucks was started. There was a lack of competition which Shultz took advantage in his initial operations in Seattle, Washington. From a single coffee shop, it grew into 16,000 Starbucks coffeehouses today, making coffee drinking a phenomenon. Customers spend as much as $6 dollars for a coffee, but along with the drink is the ambiance of music and relaxation and socialization. Starbucks’ products have made their way in retail stores, grocery shelves, and restaurants throughout the United States and the rest of the world. (Ferrell and Hartline, 2011, p. 131) Global growth is an important part of Starbucks’ strategy. The firm wants to expand globally, particularly China and India, not just within North America. Starbucks sees a great potential in the global marketplace. China and India marketplaces are enticing for global businesses like Starbucks. China is already a ‘gold rush’ for aspiring businesses. (Hitt et al., 2011, p. 225) A firm’s value chain can be defined as a series of linked activities that provides value for the firm (Porter, 1998, p. 78). Starbucks value chain includes not just the taste of coffee but also other aspects of marketing such as the design and logo. It has a brand identity which creates a lasting impression in the minds of customers. The brand is shaped in the minds of customers. A company’s value chain system can be categorized into two: 1.) the primary activities or the core competencies which includes the manufacturing of the products, the main activities in the supply chain like marketing and delivery of the product to warehouses and retail stores and to the end users; and 2.) the secondary activities that give way for the primary activities to be carried out. (Porter, 1998) 3.2 Value Network Starbucks’ corporate infrastructure has the ordinary structure which includes general management, finance department, and the departments for procedures, planning, accounting, quality management, and customer service. Primary activities include purchasing of raw materials and servicing. Materials are milk, syrup, coffee beans, and pastries. These are called inbound logistics. Outbound logistics include selling coffee drinks, which is applied with strategies like drive-thru or home-delivery. Starbucks also conducts marketing strategies like gift cards and networking. Customer service includes complaints and actions center and company/customer interaction through the company website. (Thamlitz et al., n.d.) There seems to be a Starbucks ‘milieu’ – people enjoying, taking a cup of coffee, socializing and spending their money even if Starbucks’ coffee and beverages are more costly than the others. But Starbucks’ products are unique and rarely copied by competitors. Starbucks has earned quite a reputation as a leading brand and as a cultural icon. Critics charged that Starbucks is a tool of globalization and corporate capitalism (Falk, 1999; Klein, 1999, as cited in Thompson and Arsel, 2004). Starbucks has created a distinct and unique brand, a premium brand. Consumers have valued this brand and are willing to spend higher than the other brands. This brand recognition allows Starbucks to acquire a big part of the market. Starbucks value chain system started with producing value for its products – a distinct brand of coffee which customers learned to love. This introduction of the product was accompanied with an ambiance that coffee lovers value (the coffee shop, the music, the people, etc.). And for this, the Starbucks charged customers higher than the original price of coffee. Moreover, Starbucks coffee is not an ordinary brand of coffee. It is of course Starbucks, taken from the finest coffee beans. Aside from extracting the raw materials and producing the special coffee (and other Starbucks products), Starbucks also has a unique brand of management added to the value chain. As said earlier, Starbucks value people, and people mean the customers and the employees (good employees create good customers). The main activities in the supply chain are included in the value chain – production and manufacturing, storing, selling and delivery of the product/s to the customers. A final part of the value chain is ensuring that the customers value and ‘love’ the product; meaning it meets the customer’s specifications, which includes the speed of the delivery of the product. Task C Strategic Fit Analysis When Starbucks introduced the loyalty cards, it produced about $3B, which only shows how the Starbucks segment and loyal customers are willing to spend their money for the product. In addition to the loyalty cards, Starbucks also introduced the ‘Groupons’ which garnered 1.5 million customers in just 24 hours. Because of this strategy, Starbucks competed with McDonald’s and regained the customers who temporarily tasted or valued McDonald’s products. Starbucks also introduced another new but effective technique of collecting customers, known as the Verismo System. This targeted coffee lovers who brew their own coffee. The system carried the Starbucks premium brand and is proven effective. These strategies and major competencies gained for Starbucks added premium and more profit. The latest reports state that Starbucks has surpassed expectations, gaining an increase of 9.05% in prices of stocks this third quarter of 2012. (Starbucks fights back against a growing number of competitors, 2012) Starbucks focuses on expansion within and outside the United States. Critics have said that it is a tool for globalisation, but its primary aim is to manufacture and sell specialty coffee throughout the world. It has not involved itself in political activities except that it abides by the legal and cultural norms of the countries it has penetrated. Starbucks has surpassed MacDonald’s and other retail stores selling coffee and hot and cold beverages. This firm has modified coffee into fresh-brewed, Italian-style espresso, cappuccino, Frappuccino, and other beverages and teas. Starbucks can penetrate U.S. supermarkets easily. (Pham-Gia, 2008, p. 8) This makes its strength surpassed its weakness. It values its own people and the people it serves – including the community. This was displayed when Howard Shultz revived the company to enhance the integrity of their assets, which are the company values, culture and guiding principles, gaining once again the trust and confidence of the people and its stakeholders. Regarding the technological aspect, Starbucks was the topic of blogs over the Internet about the lack of environmental programs which weakened its resolve to help the public and the environment. The target of blogs were the Starbucks own segment, the young who used to frequent coffee houses. This created a negative repercussion, especially in the firm’s profits. Shultz had to address the situation squarely, calling it an exaggeration but also answering the blogs. Shultz also said that ‘we had to own the mistakes’ and started rejuvenating the company by introducing new environmental programs and focusing on people. The case with Kraft was resolved when Starbucks stood its ground that it was not their fault and that Kraft committed a breach of contract. Starbucks had to terminate the contract due to Kraft’s not following the distribution arrangement. The U.S. District Court sided with Starbucks and there was compensation involved. Customer focus and loyalty has always been Starbucks objective. When Shultz took over management after a lapse of almost eight years, his aim was to regain the customer loyalty that the firm used to have. He did this by enhancing the product (the coffee, capuchino, Frapuccino, etc.) and the design and packaging. The ambiance of the stores had to be improved and given a new facelift. Moreover, the thousands of managers from the different coffee houses and stores in the United States had to be retrained on the company’s objectives and mission. It was only then the reputation started to reappear and make Starbucks once again the brand of coffee and store that usual customers would like to have. The management and choice of location of the various coffee houses and stores of Starbucks were distinct and unique for Starbucks. They have an almost excellent choice of location and management is customer-focus. Retail locations are also management properly and are of strategic location. The most important is the supply chain – every product and service is readily available and reaches the various branches within and outside the United States on time. Supply chain management is handled by expert managers and Starbucks’ handling of supply chain operations is superior to its competitors. Their delivery trucks and other means of transportation to transport their products reach their destinations on time, whether this be inside the United States or to various branches worldwide. (Lee, 2007, as cited in Larson, 2008, p. 55) Manufacturing and distribution are major components of the supply chain, and this Starbucks is good at. Their perfect handling of these processes allow them to have a strong inventory and a strong plus over their rivals McDonald’s or Dunkin Donuts. Although these two have food as additional products to entice customers, Starbucks has perfected the coffee business. It may take a long time before competitors will be able to take hold of Starbucks’ advantage. References Behar, H. and Goldstein, J., 2010. It’s not about the coffee: Leadership principles from a life at Starbucks. Journal for Quality and Participation, Available through EBSCOHost website [Accessed 14 December 2012]. Ferrell, O. and Hartline, M., 2011. Marketing strategy (fifth edition). Mason, Ohio: South-Western Cengage Learning. Harvard Business Review, 2004. The Interview: “We had to own the mistakes.” Available through EBSCOHost website [Accessed 14 December 2012]. Heavey, J., 2003. Starbucks, a strategic report. Available at: www.scribd.com/doc/27614539/Starbucks-a-Strategic-Report-by-Jamkes-Heavey [Accessed 15 December 2012. Hitt, M., Ireland, R., and Hoskisson, Robert., 2011. Strategic management competitiveness & globalization: concepts and cases. Mason, Ohio: South-Western Cengage Learning. Larson, R., 2008. Starbucks a strategic analysis: Past decisions and future options [online] Available at: http://coe.brown.edu/documents/StarbucksaStrategicAnalysis_R.Larson_honors_2008.pdf [Accessed 16 December 2012]. Lewis, L., 2003. Japan’s coffee kings and the Starbucks effect. Japan Inc. [online]. Available at: < http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=c7992881-bd89-4597-a484-74a4d5f32733%40sessionmgr4&vid=1&hid=24> [Accessed 14 December 2012]. Porter, M., 1998. Competitive advantage: Creating and sustaining superior performance. New York: The Free Press. Starbucks Porter’s Five Forces Analysis, 2012. Available at: [Accessed 15 December 2012]. Starbucks fights back against a growing number of competitors, 2012. Seeking Alpha [online] Available at: [Accessed 14 December 2012]. Thamlitz, J. et al., n.d.. Strategic capability. Available at: [Accessed 15 December 2012] Thompson, C. and Arsel, Z., 2004. The Starbucks brandscape and consumers’ (anticorporate) experiences of glocalization. Journal of Consumer Research, Inc., 31, EBSCOHost. [Accessed 13 December 2012]. MarketWatch, 2012. Starbucks Corp. [online] Available at: . Pham-Gia, K., 2008. Marketing strategy of ‘Starbucks Coffe’. Nordestedt Germany: Grin Verlag. United States Securities and Exchange Commission, 2011. Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934: Starbucks Corporation. [online] Available at: [Accessed 14 December 2012]. 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