Strategic Management of Starbucks Coffee Company - Essay Example

?Strategic Management Table of Contents Strategic Management Table of Contents Strategic Management of Starbucks Coffee Company 3 Market Environment Analysis for Starbucks Coffee Company 4 PESTEL Analysis 4 Political/legal 4 Economic 4 Technological 5 Micro-Environment (Porter’s 5 Forces) 6 Rivalry 6 Bargaining Power of the Suppliers 7 Critical Success Factors 7 Starbucks Strategic Analysis 8 Core Competencies 8 Human Resource Management 8 Sale/Retail Locations 9 Brand Performance 9 Application of an Innovative Business Strategy 9 Value Chain and Value Network 9 Primary Activities 10 Support Activities 11 Infrastructure 11 Procurement 11 Technological Development 11 Human Resource Management 12 Strategic Fit Analysis 12 Conclusion 16 References 16 Appendices 17 Appendix 1 17 Appendix 2 19 Appendix 3 20 Strategic Management of Starbucks Coffee Company Starbucks Coffee Company was established in 1971 in Seattle Pike Place Market as a small retail coffee shop. It is currently the largest coffee house globally with its current size satisfying a customer base of more than 40 million weekly. It operates 16,635 stores in 50 countries whereby 11,068 are located in the United States. The company operated 9,031 stores and 4,776 licensed stores as of 2011 fiscal year. The company has three operational segments namely the Global Consumer Products Group (CPG), United States (US) and International (Quelch, 2006). Its product lines include beverages such as coffee, soda, juices and Tazo tea, pastries, whole coffee beans and merchandise such as CDs and mugs. Its three largest overseas markets are Japan (more than 180 stores), England (more than 370 stores) and 120 stores in both China and Taiwan. Starbucks is currently the fastest growing food chain. It is planning to boost earnings by 20% to 25% in the preceding five years and increase its global storefronts to 40,000. The company attained a 14% increase in revenue to $13.3 billion in the fiscal year 2012. The company is optimistic that the revenues will further grow in the fiscal year 2013 at a range of 10% to 13% following the growth in store sales, new store openings and advancement in channel development business. The US segment includes both company-oriented and licensed stores. The US segment sells coffee and other beverages, whole bean coffee, complementary food and other selected merchandise through stores. Its financial management goals are conservative in that the existing stores pay for the new store installations. To ensure customer satisfaction, Starbucks focuses on value chain development, market development and penetration, horizontal integration and concentric and conglomerate diversification. This paper is a strategic analysis of Starbucks Coffee Company with focus on its United States business segment. Market Environment Analysis for Starbucks Coffee Company PESTEL Analysis The PESTEL analysis contains five factors (political, Economic, Social, Technological, Environmental and Legal) that affect the external business environment of the company (Appendix 2). The three most crucial factors affecting the US business segment of the company are political, economic and technological. Political/legal The political/legal environment of Starbucks is of high significance because the company imports all their coffee beans; international laws must apply. The high taxation rates in coffee producing countries makes the company hike the prices of their commodities. This implies that any fluctuations in the taxation rules will be passed to the consumer. Increased prices affect the consumption rates of customers. Trade issues will predominantly affect Starbucks when importing or exporting goods. According to Dlabay, Burrow and Kleindl, (2011), imposition of tariffs leads to losses as well as large income transfers that can become inconsistent with equity. The local elections may also have negative effects on the business due to the change in administration that may alter the business laws. Economic Increase in the international or local interest rates tampers with expansion plans of the company leading to reduction in production as well as supply of manufactured products. The interest rates also affect the spending characteristics of the consumers. For instance, the rise in mortgage repayment rates lowers the spending rates of the consumers making them spend less in luxuries such as coffee (Auld, 2010). Low interest rates have opposite impacts on Starbucks business performance i.e. the business level is enhanced. Low economic growth lowers the expansion rates of the company. This is because the consumer income will decrease during negative economic growth leading to less disposable income. Deterioration of economic conditions makes the consumer confidence towards products dwindle. The competitive pricing among companies may wage price wars that would lower the profits as every enterprise tries to maintain its share of the market. Globalization of the coffee market has led to low coffee prices; making many farmers to shun coffee production. The reduction in the supply of the coffee bean has reduced the production levels of Starbuck, creating shortages of coffee products in the US markets. Variation in the exchange rates also affects Starbucks. Deterioration of the currency in nations supplying the coffee beans increases the company’s revenue as well as savings. This enables them to transfer the profits to the customer through reduction in prices and enhanced quality. Technological Application of technology in Starbucks Company such as installation of coffee making machines and computerized cash registers will enhance the efficiency of the employees. This will enhance customer satisfaction and increased numbers of customers served on a daily basis. According to Franklin (2011), application of the internet technology in marketing enhances company competitiveness. Service delivery may also be enhanced through internet application as orders can be made online. Being a multinational company, Starbucks has a high potential of establishing an efficient research and development department that can assist in updating company information for customers to access. Application of technology is an opportunity which can be utilized in ensuring customer satisfaction and competitiveness. Micro-Environment (Porter’s 5 Forces) The five forces shaping competition within the industry include competitor rivalry, bargaining power of the buyers, risk of new entrants, the threat of substitute products and bargaining supplier power (Lynch, 2012; Appendix 1). Although all the forces impacts on the company and industry, the two most significant forces impacting the strategic management of the Starbuck Coffee Company are competitor rivalry and the bargaining power of suppliers. Rivalry Rivalry exists in the form of competition from the already established firms. The definition of the industry in this perspective is dependent on comparing the products offered by the customers and the substitutes offered outside the industry. The competition created by rivalry between the industry players drives down the return on invested capital. The competition environment of the coffee industry is comprised of both product based and retail-based competition. Starbucks’ competition is grouped into products and store venues. The company’s main rivals for the US market include Dunking Donuts and MacDonald’s (Goldsmith, 2007). With the projected rise in the US market, the annual growth rate is expected to increase if efficient strategies will be applied to by the company to frustrate competition in the industry. The company is expanding its market share more rapidly than many coffee shops (Quelch, 2006). This makes it a formidable competitive force in regards to coffee house and coffee experience. Rivalry also emanates from the independent outlets that have significantly grown in the recent past. However, they present insignificant threat to the company products. The real competitive threat comes from giant companies such as the MacDonald’s that has gone to the extent of venturing into the Starbucks’ expanded products such as renting DVDs. The competitive threat is expected to increase in magnitude. This is due to increased number and magnitude of competitors in the future that are diversifying along undefined lines. Rivalry is a threat to the company because the strategies applied in curbing it are expensive. This has been enhanced by recession that makes consumers that are not loyal to the company products shift their loyalty to substitute products which are less expensive e.g. coffee from MacDonald’s. The competitors are gaining ground because the company is having trouble adjusting prices due to the rise in the coffee and dairy products. Bargaining Power of the Suppliers The bargaining power of the suppliers is related to their ability to raise the prices of the Arabica beans. They can also alter the quality or quantity of the coffee beans supplied. According to Lee (2007), the suppliers of the coffee beans are normally medium-sized farmers that use local markets to sell their products. The suppliers’ bargaining power was low in the past because most of the farms were dispersed and not related to each other. However, most of them have recently formed unions that increase their collective bargaining power. Increase in the bargaining power of the suppliers is a threat to Starbucks because the prices will be determined by the customer. The bargaining power of the suppliers has also been enhanced by the recent rise in complaints asserting that the small scale farmers are being exploited by multinational companies. This has placed the company under international scrutiny related to importation and pricing of the coffee. Critical Success Factors The success factors that the company has capitalized in promoting and enhancing its market share include enhanced advertising activities, products quality, offering competitive prices, ensuring reliability in the management and maintenance customer loyalty. The company is characterized by a stable financial position, diversification of its functions in the global levels, offering fair employee benefits and offering customer service that ensures satisfaction. Starbucks Strategic Analysis Core Competencies The company’s core competencies are visible in the areas related to marketing, human resource management and operation of its retail outlets. According to Johnson, Whittington and Scholes (2011), focus on the core competencies enables the business to create a consistent and sustainable competitive advantage through a combination of employee empowerment strategies, passion for enhancing the brand performance and creation of a quality work environment. Human Resource Management Starbucks values its employees as the most crucial assets in maintaining competitive advantage. This has led to the creation of a favourable working environment. Such environment includes an empowering corporate culture, provision of employee benefits and promoting employee stock ownership programs. The employee employment strategy has been enhanced from the top leadership to the junior levels of management i.e. from managers to baristas. Employees are encouraged by the management to make independent decisions without interference and consider themselves as part of the corporation. Marketing Starbucks brand understands consumer values, needs and lifestyles. According to Quelch (2006), the company invests heavily in advertisement strategies that include online advertising, billboards and installing signs at Safeco field. The marketing strategies have created a wide consumer outreach compared to that of other competitors. Sale/Retail Locations The focus on uniqueness in service delivery distinguishes the company services from that of its competitors. The retail outlets act as the pillar for the organisational operations and revenue collections with the company headquarters serving as the facilitator for smooth operations. The locations have been popularized by excellent services offered that are applicable to all customer ages. Excellence in the retail outlets has been ensured through hiring passionate and ethical employees who are also willing to establish a profitable commercial connection with the customers. Brand Performance Starbucks has created a successful brand, popular with the customers globally, through use of cost-effective marketing strategies (Lynch, 2012). The company hardly relies on advertisements. Instead, the personal customer interactions, omnipresent cafes and the attractive storefronts act as global brand promoters. The brand has been built through high products quality, excellence in addressing the customer concerns and consistency in excellent service delivery. Application of an Innovative Business Strategy The marketing strategy of the company focuses on a combination of factors that includes the product (coffee), employees, customer, location, service and ambience (Auld, 2010). These factors are organised to work in synergy. The company has acquired strong financial due to increased levels of revenues. Value Chain and Value Network The diagram below represents the value chain of the Starbucks Coffee Company The value chain divides the Starbuck activities into primary and secondary. Primary Activities The inbound logistics in the company involves the business agents choosing the coffee bean producers, communication of the quality standards required by the company for the coffee bean, establishing the required relationships with the producers, and organising the supply chain management. According to Starbucks Company Profile (2011), the company operates 8870 stores globally. The operation mode of these stores is either direct or through license. The outbound logistics for the company involves selling their products through stores without engaging any intermediaries. However, recent developments in products diversification have seen a rise in the engagement of intermediaries e.g. selling coffee sachets through supermarkets. According to Allison (2006), the company does not rely on marketing and advertisements. It uses the word-of-mouth marketing model, offering high quality customer products and high range of services. However, sampling is currently being employed where the products are displayed outside the stores and sample offered (Shimizu, 2012). Offering high level services is another primary objective that the company applies to uplift competiveness. All employees are encouraged to devote extra efforts in ensuring customer satisfaction. Support Activities Infrastructure Starbucks’ infrastructure includes several support activities such as legal, accounting, planning and management among others. According to Hitt, Ireland and Hoskisson, RE, (2009), the support activities are required to support the performance of the entire value chain. Procurement Procurement in Starbucks includes the supply of raw beans and coffee grains required for the production of final products. Additionally, fixed assets such as machinery and buildings require to be procured to enhance service delivery. Technological Development Technology is required for cost-saving strategies, ensuring consistent quality service delivery and customer satisfaction (Hitt, Ireland and Hoskisson, 2009). For instance, consistency in offering high quality coffee has been ensured through installation and application of computerized coffee roasters. Human Resource Management Improved performance is ensured through maintaining a motivated and effective workforce. Employees are motivated through offering various incentives such as fair remuneration packages and allowances. Employee effectiveness is ensured through offering training and development programs. Strategic Fit Analysis Strengths Weaknesses United States segment has been in operation longer than other segments or competitors implying that its marketing capability is higher. Starbucks has portrayed prowess in the coffee business industry thus emerging the leading company with long-time marketing experience. The company has recently diversified and floated additional products in the market which taps on a wide range of customers. The company’s focus on brand establishment has enhanced recognition among consumers in America. The brand is enhanced through offering quality coffee and excellent customer service. Starbucks good working relationship with the suppliers ensures constant and consistent supply of raw materials leading to consistent production of coffee. Customer loyalty has been ensured through maintaining products and brand consistency (Allison, 2006). Involvement in eco-friendly activities such as water conservation practises within USA has won the loyalty from a wide range of local consumers. The segment has maintained close interaction with the customers through participation in the local community projects. The local consumer confidence has been enhanced through wide acceptance of the Starbucks’ products internationally. The company has been able to maintain a sustainable level of profitability that has enabled it retain its marketing dominance. Application of innovation has improved service as well as product quality. This has expanded local markets. The company management views employees as a brand thus ensuring effectiveness through training and education. Starbucks coffee products are widespread within the USA. The markets are enhanced by the fact that coffee is a socially acceptable addiction (Goldsmith, 2007). Their stores are highly visible and strategically located. This enhances accessibility to the customers. Most stores are scarce in rural locations. This reduces the customer base. More efforts are still required to expand markets in the US as the rural and suburban areas have been lacks coffee supply. The company is facing a risk of losing more customers due to a rise in the commodity prices. The industry is facing growing competition from other companies such MacDonald’s (Goldsmith, 2007). This lowers business revenues and leads to increase in expenses geared towards promoting the marketing strategies. The sizes of the stores are normally small leading to overcrowding of consumers who normally visit them in large numbers (Starbucks Swot Analysis, 2012). Product returns have risen of recent. This has made many consumers shift their base to substitutes and other companies. The prices of Starbuck products are higher compared to the prices of the commodities for the competitors. Some locations have limited products leading to shortages. The strong presence in the US has led to limited international growth. Opportunities Threats Adapting to more markets as the company expands can lead to emergent of more business products. The company has the potential to develop new distribution and delivery channels to improve supply. Starbucks has an opportunity for strategic growth initiatives such as investment in rural areas. Starbucks is destined to create a global coffeehouse experience through focusing on potential markets (Starbucks Swot Analysis, 2012). The company can venture into more promotion strategies through application of effective means such as offering coupons. The technological advances can be applied to increase marketing and production skills. New markets can be established within the USA through focus on the rural and suburban regions where the number of stores is currently inadequate. They can invest in the emerging international markets. The online interactive segment MyStarbucksIdea.com provides the feedback and opinions from the consumers that are necessary for the promotion of service delivery and product quality. The prominent threat is competition that emanates from other coffee houses, restaurants, supermarkets and caffeine based products. The company’s reliance on international suppliers for coffee may lead to inconsistent production in case of shortage or legal restrictions. Some of the potential small segments at the local level have been alienated. Economic downturn and recession affects customer spending Its already established behemoth size implies that the company has to struggle and remain at the top of the industry. Any mismanagement will give way to other competitors to dominate the market. Compliance with the international trade legislation may increase the prices of the products for the local consumers; affecting the local consumption. Complaints related to unfair customer treatment in the developing countries have tainted the reputation of the company locally. Several websites criticizing the company’s products, services and its environmental impacts (Starbucks Swot Analysis, 2012). Conclusion The company is successful due to its focus on strategic stances based on consumer, outlet location and the employee. The specific strategies applied include value chain development, market development and penetration, horizontal integration, concentric and conglomerate diversification. The company possesses many opportunities related to its growth potential and ability for both local and international and expansion. In addition to its brand, other strengths of the company include high financial performance, brand loyalty and application of innovation. Its weaknesses are related to heavy reliance on the US market, international price sensitivity and the possibility of overcrowding in its stores References “Starbucks Company Profile” (2011) viewed 13 Dec 2012 from .   "Starbucks Swot Analysis." (2012) Scribd, Scribd viewed 13 Dec 2012 from . Allison, M. (2006) ‘Starbucks takes unique approach to marketing’ Seattle Times, The Seattle Times Company, viewed 13 Dec 2012 from . Auld, G. (2010) Assessing Certification as Governance: Effects and Broader Consequences for Coffee. Journal of Environment & Development, vol. 19, no. 2, pp. 215-241. Dlabay, L, Burrow, JL & Kleindl, B, (2011) Principles of business, Cengage Learning Franklin, M. (2011) Managing business transformation: a practical guide, Ely, Cambridgeshire, U.K, IT Governance Pub. Garlichs, M. (2011) The concept of strategic fit, Hamburg, Diplomica-Verl. Goldsmith, J. (2007) U.K. McDonald's to serve up free Wi-Fi, viewed 13 Dec 2012 from York Times . Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. (2009) Strategic management: concepts & cases, Cengage Learning Johnson, G., Whittington, R. & Scholes, K. (2011) Exploring strategy: text and cases, FT/Prentice Hall. Lee, H. (2007) Starbucks corporation: building a sustainable supply chain, Stanford, Stanford Graduate Business School. Lynch, R. (2012) Strategic management, Pearson. Quelch, Y. M. (2006) Starbucks: delivering customer service Boston, Harvard Business School. Shimizu, K. (2012) The cores of strategic management, Hoboken, Taylor &, Francis. Appendices Appendix 1 1971: The first Starbucks, called Starbucks Coffee, Tea, and Spice is opened across from Pike Place Market in Seattle, Washington. The three founders - English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker, derived the store's name from a Moby Dick character, Starbuck. The first stores do not sell beverages. They sell retail coffee beans. 1972: A second Starbucks store is opened in Seattle. Early 1980s: Zev Siegel leaves the company. Jerry Baldwin takes over management of the company and functions as CEO. Gordon Bowker remains involved as a co-owner but other projects take up most of his time, including the launch of his new microbrewery, The Redhook Ale Brewery. Sept. 1982: Howard Schultz joins the company, taking charge of marketing and overseeing the retail stores. 1984: Starbucks acquires the five stores in San Francisco's Peet's Coffee and Tea chain. During this period, Schultz makes several attempts to convince the original owners to start selling coffee beverages but they prefer to keep the focus on retail coffee products. April 1984: Starbucks opens its fifth store, the first one in downtown Seattle. Schultz finally convinces the owners to test an espresso bar, making this Starbucks the first to sell coffee beverages. It becomes a huge success. Late 1984: The Starbucks founders are still resistant to installing espresso bars into other Starbucks locations and Schultz becomes increasingly frustrated. He has visited the espresso bars of Milan, Italy and has a vision of bringing Italian-style espresso bars to America. Late 1985: Schultz leaves Starbucks and starts the Il Giornale Coffee Company. Jan. 1986: Schultz raises enough seed money to open several Il Giornale coffee houses. Starbucks founders Baldwin and Bowker support his new endeavour and invest money in the new company. April 1986: The first Il Giornale store opens. March 1987: Baldwin and Bowker decide to sell the Starbucks Coffee Company, with Baldwin keeping the Peet's segment of the company. Aug. 1987: Schultz acquires Starbucks and rebrands all of his Il Giornale coffee houses with the Starbucks name. 1987: Starbucks opens locations in Vancouver, British Columbia and Chicago, Illinois. 1992: Starbucks goes public with its initial public stock offering. At this time it has 165 outlets. 1996: The first Starbucks opens outside of North America in Tokyo, Japan. Sept. 1997: Starbucks Chairman Howard Schultz publishes a book called Pour Your Heart into It: How Starbucks Built a Company One Cup at a Time. 2000: Starbucks sues San Francisco cartoonist Kieron Dwyer for copyright and trademark infringement after she creates a parody of the company's trademark mermaid logo. The case is eventually settled. April 2003: Starbucks purchases Seattle's Best Coffee and Torrefazione Italia from AFC Enterprises and turns them all into Starbucks outlets. May 2003: By this time, Starbucks has more than 6,400 outlets worldwide. May 17, 2004: Starbucks baristas at the 36th and Madison store in Manhattan organise the first Starbucks barista union. They claim that the starting wage of $7.75 per hour is not a living wage in New York City and that the company does not guarantee a minimum number of hours. July 22, 2004: The Retail Workers' Union IU/660 files an unfair labour practice suit against Starbucks, alleging the company threatened wage cuts and bribed employees in order to influence the results of the barista's union vote. Oct. 4, 2004: XM Satellite Radio and Starbucks Coffee Company announce the debut of the Starbucks "Hear Music" channel on XM Radio. The station will feature 24 hour music programming featuring an "ever-changing mix of the best new music and essential recordings from all kinds of genres." Aug. 2005: After Starbucks prints a quote from Armistead Maupin on its cups as part of their "The Way I See It" promotion, the conservative Christian group Concerned Women for America protests. The quote reads: "My only regret about being gay is that I repressed it for so long. I surrendered my youth to the people I feared when I could have been out there loving someone. Don't make that mistake yourself. Life's too damn short." Sept. 8, 2005: Starbucks announces plans to donate funds and supplies to the Hurricane Katrina relief effort. Plans include monetary donations over $5 million as well as donations of coffee, water, and tea products. Oct. 21, 2005: ABC's 20/20 airs the results of an investigation into coffee outlets serving regular coffee when decaf is ordered. One Starbucks outlet is found to be serving decaf loaded with caffeine. A Starbucks spokeswoman says: "in two samples taken by 20/20, the caffeine content was consistent with regular, not decaffeinated, coffee...We believe this error to be an isolated incident and an unfortunate occurrence that we take seriously. We have sent information to our stores to re-emphasize our operating procedures." Source: http://www.twoop.com/food_drink/archives/2005/10/starbucks_coffee_company.html Appendix 2 Political Industry-specific rules and regulations The level of relationships between USA and countries that produce coffee beans The level of political stability within a country Economic Buying power of consumers Local currency exchange rates Local economic environment within each market Starbucks operates Taxation level Social Changing family patterns in USA and Europe Consumer preferences Changing work patterns Changes in lifestyles of population The level of education of population in local markets Changing values among population Technological Emergence of innovative technology Biotechnological developments Developments in agriculture Environmental Environmental rules and regulations Environmental disasters in countries producing coffee beans  Global warming and other environmental issues in a global level Legal Introduction of policies and regulations by health authorities  about caffeine production and consumption Introduction of tougher customs and trade regulations Licensing regulations related to the industry. 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