Strategic Management of Starbucks - Essay Example

? Strategic Management- Starbucks Contents Introduction 2 Strategic Issue 3 Situational Profile and Prospects 3 External Analysis 4 Porter’s Five Forces Analysis 4 Key success factors 7 Industry Profile and Attractiveness 8 Company Situation 9 Financial analysis 9 SWOT Analysis 10 Recommendations 11 Porter's Generic Strategy with respect to Starbucks 11 Strategy Recommendations 12 Objectives 13 Strategic Justification 14 Works Cited 15 Appendix 16 Name of the Student Name of the Professor Course Number Date Strategic Management- Starbucks Introduction Starbucks Corporation, one of the most renowned coffee companies across the globe, had started in the year 1971. The company rose to become the largest coffeehouse organization in the world. At present, the company operates in over 62 countries with more than 21,000 stores. Major Starbucks’ consumers come from United States, Canada, Japan, China, United Kingdom as well as other nations such as, South Korea, Mexico, Taiwan, Philippines, Turkey, Thailand and Germany. It is a public company with its headquarters in Seattle, Washington. Currently, Howard Schultz is the president, chairperson and CEO of the company (“About Us”). The organization is in restaurant business and serves whole-bean coffee, cold and hot beverages, instant coffee varieties, snacks, pastries and full-leaf teas. Apart from the major selling items, the stores also sell cold and hot sandwiches, packaged food products and other items such as, tumblers and mugs. The business operations are strategically diversified according to the customer trends, traffic as well as demands. For instance, Starbucks Evening offers varieties of wines, beers as well as appetizers after 4 pm. Another arm called Starbucks’s entertainment and brand, Hear Music, markets music, films and books. This is a strategic division with the objective of engaging consumers through different channels. Products and services are seasonal and change according to the store locality as well as local demands. It also reaches another set of target customers through its coffee and ice-cream range offered at various grocery stores. Starbucks’ mission statement is “to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time” (“Mission Statement”). At present, the company is planning to restructure by shutting down unprofitable chains and opening stores in new emerging markets. Also, market saturation is forcing Starbucks to use a more innovative and persuasive approach to reach consumers across various regions. The current report will start with profiling the company, evaluating the current situation and prospects for future. This will be followed by evaluation of the external environment and key success factors for the organization. Strategic Issue Situational Profile and Prospects The potential challenges in front of Starbucks are the increased competition from new and emerging retailers. These retailers may not have an identical concept as Starbucks, but they have been able to attract particular category of customers, especially those with low levels of loyalty. Overall economic conditions also pose a strategic challenge for the coffee giant. Starbucks is perceived as a luxury coffee parlour catering high-end customers and corporate professionals. With the recession hit, the company is experiencing loss in many of its store outlets even in prime locations across the globe. This has raised a doubt regarding the feasibility of the present strategic action plans. Also, being perceived as a high-end retail chain, offering discounts and other promotional benefits to increase sales might not go well with its loyal and regular customers (Koehn 25-45). The company’s business operations have also been criticized for over-diversification in recent years by offering products like, ice-cream and chocolates, which did not perform well in the market and negatively affected the bottom-line of the company. The current strategic direction of Starbucks has also been criticized for its lack of commitment and effective business models which has led to the failure of its various business operations (Baker, 1999). External Analysis Porter’s Five Forces Analysis Barriers to new entry In the current scenario, coffee has become a real favourite and much wanted hot beverage consumed by individuals all over the globe. As a result, many big and small companies have been involved in this coffee business. However, the economic and financial barrier between producers and retailers is huge. Majority of coffee production takes place in developing countries where farmers lack sufficient funds as well as technology for better production. In general, it is not very difficult establishing a small coffee parlour. However, launching a big retail chain with outlets, in various national and international locations, will have many barriers. Coffee chains are run by popularity and brand name. Supplier management is also a barrier as new entrants have no power of suppliers. The inventories and available resources are captured by the major players, which makes it difficult for newcomers to cut deals with established suppliers. Starbucks has made a powerful mark in the coffee industry by establishing a strong rapport with the top suppliers. Also, it has a cost advantage as it also sources raw materials directly from producers. The likes of giants such as, Starbucks, have made barriers to entry high in this industry (“Trade and Globalization”). So, it is reasonable to say that entry barriers are rather difficult and high, unless the organization has a well-defined marketing team, financial advantages and name recognition, as it is otherwise tough for the new and unknown chains to enter this industry. Bargaining Power of suppliers In the coffee industry, bargaining power of suppliers has been relatively limited. Most of these suppliers come from developing economies and do not posses adequate funds. They are also not in position to raise the prices. However, firms within the coffee industry tend to use suppliers for production. Here, suppliers have established bargaining power by charging higher prices or limiting the service or quality of raw materials. As a supplier, setting high price is a strategic way for confining consumer surplus and transforming it into supplier or producer surplus. This results in a declining social welfare as the produced amount will be less compared to a perfect competition (Bacon 20). Thus, organizations are in a squeeze-out situation as they are unable to deal with increased costs and cannot even raise their own prices, especially if customers are price-sensitive. Starbucks has an advantage over its suppliers because of its vertical integration. Majority of its raw materials are directly purchased from the farm, thereby reducing risk from suppliers (Chaston 57). However, the financial, economic and political conditions of the sourcing country might influence pricing and availability of raw materials. Buyer’s bargaining power In case of coffee industry, buyers represent both consumers and retailers. The major difference between the two is that consumers are more sensitive to prices, in terms of undifferentiated products, which means that they can always find the required products somewhere else. Price sensitivity increases with the decreasing loyalty towards a company (De Mooij 123-170). Retailers gain bargaining power over producers, if they are able to influence customers downstream by either advertising or setting of final prices. Buyer power is critical in this sector as satisfaction level from customer side influences loyalty, repeat purchase as well as growth prospects. Since word of mouth is an important factor in this business of hot beverage, it is important for retail chains to consistently provide top-class service. Starbucks is seen as a high quality brand and most of its customers are not price-sensitive. However, in order to grow in this business, the retailer will have to focus on other customer classes too, including price sensitive groups. It might be noted that in this economic downturn, even upper-end customers are prone to price sensitivity. Thus, buyer power can be considered as intense because of growing price sensitivity, changing loyalty, increasing income and changing preferences for taste. Competitive rivalry Apart from intense competitive rivalry from major players of coffee products, the industry also faces challenge from smaller coffee joints. In terms of market share, Latin and European markets are coffee dominating. Internal rivalry is intense as suppliers and producers are same and profit margin is low. Local rivals also take away chunks of market share, which further affects profitability. Starbucks’ major rival includes big players such as, Barista, CCD as well as local coffee parlours. However, unique coffee features as well as high quality products have kept Starbucks at a differentiated position. Since profit margin is low, aggressive marketing is needed to further intensify competition. Threat of substitutes The major substitute for coffee is tea. It is also a hot beverage which is widely consumed in many countries across the globe. The Asian continent is still dominated by tea consumers, where coffee consumers constitute a lower market share. Other substitute and complimentary products include soda pop, energy drinks as well as juices. Economic recession may reduce profit margins of high-end coffee products. However, majority of regular coffee drinkers do not substitute for other drinks, so strength of substitute products can be considered as moderate. Key success factors 1. Realization of a greater market and international expansion Early expansion to new and emerging economies will provide Starbucks with first mover advantage. These international expansions should be strategically placed according to the host nation’s economic, financial and socio-cultural environment. For instance, the international markets can be targeted into two categories namely untapped market and stable market. Nascent target markets will include emerging economies and developing nations. Here, foreign investments are welcomed but consumers will be price sensitive. Thus, Starbucks can launch its products and services based on the consumer sentiments and market sensitivity to prices. Compared to this, developed nations will have a stable market with existing rivals. Here, expansion strategies will include adding new and exotic varieties with a better and faster service quality. 2. Understanding and evaluation of international cultural context International expansion has always been prime strategy for growth and development. The organization has been able to replicate its American success strategy into various nations. However, recent expansion strategies of Starbucks had come at a price. High prices charged by Starbucks to farmers were boycotted in New Zealand and Lebanon. While establishing its stores in European locations, the company has to adjust its coffee according to the local taste. This explains that understanding the cultural context of the foreign market will be crucial in winning the battle for market share. This understanding will be strategically applied to launch tailor-made products and service categories as well as a pricing range to suit local population. 3. Achievement of global competitive advantage Starbucks poses multinational flexibility in order to manage and take on risks that come in its way. The company has established capital resources and supplier relationships providing necessary support during crisis. However, there are many risks associated with its expansion strategies and current economic environment. There is volatility in customer trends and consumers are more prone to switch brands due to various reasons including price, better ambience, better services and more coffee varieties. In order to achieve global competitive advantage, Starbucks will have to take several strategic steps. First one will be to establish long-term relationship with producers and farmers through reward programs as well as helping them in an environmentally responsible coffee farming. Establishing employee empowerment through internal reward system and offering fun and hip working environment can be another strategic implementation (Keller 35-75). Industry Profile and Attractiveness Coffee is regarded as one of the biggest and important trading commodities across the globe. It is produced in more than 50 nations and annual coffee production accounts for more than 10 million tons. Major coffee producing nations include Colombia, Brazil and USA. However, many new emerging economies have started coffee production. The attractiveness of coffee industry depends on the scale of operations of the new incumbents. Expecting growth and profit in initial years might lead to disappointment, as brand identity, recognition and image play an influential role in gaining competitive advantage. So, new entrants will have to continuously make strategies and strive in this low profit margin market in order to establish them in the future. Company Situation Financial analysis 1. Profitability: It is the ability of the business to generate earnings compared to expenses and other costs. The overall profitability of Starbucks started decreasing after the bubble burst in 2009. After that, the company recovered its asset turnover as well as return on equity. However, the last year went unexpectedly negative leading to huge changes in organizational strategies. The EBT (earnings before interest and tax) went negative in 2013 showing huge decline in the profit margin. This implies an urgent need of market and strategic restructuring and action planning for a stable future (Morning Star, “Starbucks Corporation”). 2. Liquidity: Liquidity implies the accessibility of liquid assets to a company or market. The company’s cash assets can be determined by looking at their cash and short-term investments and current liabilities. The short-term investment of Starbucks has increased over time. However, the current liabilities have also increased in the past few years. This means that the company is running out of liquid money (Yahoo Finance, “Starbucks Corporation”). 3. Leverage: The financial leverage of Starbucks can be determined from their debts, assets, equity and interest expenses. Though the company has stopped taking short-term debts since 2009, its long-term debts have increased to a considerable amount. The company’s liabilities have almost doubled compared to last year, whereas its equity has remained same showing stability in its investment. Decreasing total assets and increasing interest expenses show that the organization has hugely invested in its global expansion strategies. 4. Activity: Financial activity indicators are used to analyze the ability of an organization to turn production or manufacturing into cash. The asset turnover ratio has declined continuously in the past few years showing company’s decreasing profit margin. The inventory turnover ratio, on the other hand, has increased which implies that the sales have gone weak over time. This suggests that overall industry sentiment is volatile and the company needs to make attractive strategies, so that customers buy its products like before. At present, Starbucks is dealing with an acute financial slowdown. The company is experiencing diminished growth for few years. The major reasons can be attributed to volatile economic environment, changing consumer sentiments, decreased profit margin and increased competitive rivalry. SWOT Analysis Strengths Considering the earlier discussions regarding the external environment and financial analysis of Starbucks, it is clear that the company has established power brand recognition and is backed by strong financials. Even in the time of economic downturn, the company has been placed as the top coffee brand as well as largest running coffeehouse chain (Loudon and Della Bitta 35-50). Industry analysis has also confirmed that Starbucks have got a powerful hold on the suppliers as well as producers, thereby giving it a competitive edge. Weakness According to the current financial reports, the company is suffering majorly because of economic volatility and increase in prices of coffee beans, which has negatively impacted the company’s profit margins. Negative publicity resulting from various protests and campaigns has also affected the company’s image. Another weakness is Starbucks’ premium image which forces the retail giant to withhold any discounts or freebies, causing loss of price sensitive customers. Opportunity The current industry analysis as well as organizational situation opens many avenues of opportunity, especially in emerging nations. The organization can also extend its supplier network and reach out to local suppliers from production countries, thereby saving costs. Another identified opportunity is offering exotic coffee varieties at premium pricing, which will help in creating brand equity as well as distinctiveness (Wang, Solan and Xu 94-98). Threats The current economic trends and industry overview suggests that prices are going to rise for dairy products and coffee beans, hampering further profits and revenues. Markets in developed economies have saturated disrupting growth (“The Good, the Bad, and the Ugly Side of Globalization”). Threats have also started coming from local players eating away chunks of market share. Another threat may come from supply disruptions in emerging markets, causing further damage to the revenues and profits. Recommendations Porter's Generic Strategy with respect to Starbucks The diagram given below represents the Porter's Generic Competitive Strategy. As far as applying the concept with respect to explaining the strategy followed by Starbucks is concerned, it can be said that, Starbuck's as a whole follows the differentiation strategy particularly because they provide a superior quality coffee and unique experience and that too in the convenience of a large volume of locations, which makes them stand apart from their competitors. The new instant coffee line offered by Starbucks, known as the VIA, is the straddling differentiation and low cost-leadership. This product will be a lost cost and convenient alternative that will be added the already diverse menu of Starbucks regular coffee, it will still be an unique product that will be available in the market. The in-store gifts that are available as well as the brewing utensils belong to the focused differentiation category. The reason that can be attributed to this fact is that these items cater to the coffee lover; this is a unique way of attracting customers and these unique items are only available in the Starbucks stores. Fig 1: Porter's Generic Competitive Strategy (Source: Lee, "Case study: Starbucks Coffee") Strategy Recommendations After analyzing the industry attractiveness as well as strengths and opportunities of Starbucks, few generic as well as grand strategies can be generalized. Generic strategy will include organizational arrangement, specific skills and resources. Considering the current industry trend and organization’s position, the best generic strategy will be establishing competitive advantage through differentiation and cost leadership. The company has opportunities in emerging markets. Here, the strategies will be to analyze the consumer market trend and implement pricing and product strategies accordingly (Agres and Dubitsky 23). Emerging economies will also provide first mover advantage to Starbucks which can be backed by its strong supplier and producer relationship. In case of developed economies, the attention will be on high margin retail outlets. The company can close unprofitable retail outlets and focus more on the major profitable areas in the location. The consecutive grand strategy will be market growth and development in strategic locations across the globe. This will also include establishment of few branch offices across prime sales locations. This will help in better coverage of those areas along with a better observation of consumer trends. Another important strategic recommendation, evaluated after industry and company analysis, is focusing on the core business. After evaluating the financial reports, it has been found out that the organization’s new venture is not performing well. For instance, the ice-cream business started by Starbucks is now running at a loss. Thus, a strategic step for the management will be to cut off the businesses which are running at a loss and focus on the core coffee business. This will help in minimizing the current threat of losing revenues over unproductive business and investing more on the profitable business. In order to achieve competitive advantage in saturated markets, Starbucks has made strategic initiatives such as, introducing rare and exotic coffee variants with special characteristics (Bolier 35). This will come in premium pricing range and provide sustainable competitive advantage. This will be particularly beneficial in premium outlets where high-end and rich visitors and customers come and can afford premium coffee variants. Objectives The performance objective will be monitored in terms of sales and profitability goals. The short-term sales and profitability goals will be monitored through revenue generation in new store locations and increase in number of suppliers and important producers. Long-term results can be monitored through annual revenue and profit increase of the organization, overall growth in market, increased customer sentiment and increase in overall brand equity. The key performance indicator for non-financial objectives of Starbucks will include increase in customer loyalty, increase in commitment and loyalty from suppliers and producers and better employee-organization relationship. Strategic Justification The recommended strategy is the best viable strategy for a number of reasons. The company’s lesser known brands are not doing well, which makes it an imperative for Starbucks to cut those unprofitable branches and focus on the major selling product. Also, coffee industry has reached a mature stage, dominated by few large players and many differentiated smaller ones. Therefore, it become necessary for Starbucks to start venturing into new and emerging economies which are still untapped and gain first over advantage. The recommendations here have been finalized after proper strategic analysis. Works Cited “About Us”. Starbucks. Starbucks Corporation. Web. 20 December 2013. Agres, Stuart and Tony M. Dubitsky. “Changing Needs For Brands.” Journal Of Advertising Research, 1(1996): 21-29. Print. Bacon, Christopher. Confronting the Coffee Crisis; Fair trade, Sustainable livelihoods and Ecosystems in Mexico and Central America. Cambridge: MIT Press. 2008. Print. Bolier, David. Aiming Higher, 25 Stories of how companies prosper by combining solid management and social vision, London: Business Enterprise Trust. 1997. Print. Chaston, Ian. Knowledge-based Marketing. Thowbridge: Cromwell Press LTD. 2004. Print. De Mooij, Marieke. Consumer behavior and culture: Consequences for global marketing and advertising. Thousand Oaks, CA: Sage Publications, 2004. Print. Keller, Kevin. Strategic Brand Management, Building, measuring and managing brand equity, London: Kogan Page, 1998. Print. Koehn, Nancy. Howard Shultz and Starbucks coffee company. Harvard: Harvard School of Business. 2001. Print. Loudon, David and Albert Della Bitta. Consumer Behavior, 4th Edition, USA: McGraw Hill, 1993. Print. “Mission Statement”. Starbucks. Starbucks Corporation. Web. 20 December 2013. “Starbucks Corporation”. Morning Star. Morning Star. Web. 20 December 2013. “Starbucks Corporation”. Yahoo. Yahoo Finance. Web. 20 December 2013. “The Good, the Bad, and the Ugly Side of Globalization”. Forbes. Forbes.com. Web. 31 October 2013. “Trade and Globalization”. Globalization. The Levin Institute. Web. 31 October 2013. Wang, Jianfeng, David Solan and Bo Xu. “Cross-Culture Integration and Global New Product Development.” Review of Business and Finance Studies, 5.1(2013): 93-98. Print. Lee, Kathleen. "Case study: Starbucks Coffee." Web. 31 October 2013. Appendix Figure 1: Porter’s five forces analysis of Coffee Industry (Source: Author’s Creation) Figure 2: Starbucks Profitability Analysis (2004-2013) (Source: Morning Star, “Starbucks Corporation”) Figure 3: Starbucks Growth Analysis (2004-2013) (Source: Morning Star, “Starbucks Corporation”) Figure 4: Starbucks Key financial ratios (2004-2013) (Source: Morning Star, “Starbucks Corporation”) Figure 5: Starbucks Income statement (2004-2013) (Source: Morning Star, “Starbucks Corporation”) Figure 6: SWOT Analysis of Starbucks Strengths 1. Proven financial track. 2. Strong brand recognition. 3. Largest chain of coffeehouse across the globe. Weakness 2. Increasing prices of raw materials. 2. Customer perception as high-end and premium coffee retailer. 3. Negative publicity in few locations. Opportunity 1. Extending the supplier network. 2. Expanding to emerging economies. 3. Increasing product offerings. Threats 1. Rising prices of dairy products and coffee beans. 2. Increasing competition from local cafe retailers. 3. Saturated markets across developed economies. (Source: Author’s Creation) Read More