Strategic Management of Starbucks Coffee Company - Research Paper Example

Strategic Management of Starbucks Coffee Company Table of Contents (A) 1 (B) 8 (C) 18 Conclusion 25 References 26 Bibliography 31 Introduction Starbucks Coffee Company started in 1970 in Seattle in the United States of America. It was the first store that had opened in Seattle in the US and people would come from different places to this store. Starbucks Coffee Company imports quality coffee beans from all over the world and provides the finest coffee to the people of the United States of America (Starbucks Corporation, 2009). (A) Starbucks Business Position Starbucks started to expand when the market experienced an increasing demand for coffee. The expansions of the stores were due to the high demand of the coffee that the company had provided to the consumers of Seattle and the other consumers who travelled from different parts of the US. The continuous demand and the quality level of coffee and service of Starbucks has made the corporation global leader in offering specialty coffee in the coffee industry. Starbucks provides superior quality of coffee at premium prices with higher customer service level across the world (Larson, 2009). It was the image of the corporation that increased the sales of Starbucks. The company’s image and reputation made the corporation to lead the market. The corporation’s high quality of coffee and service created a brand value for Starbucks and this was the main reason for success of the corporation in the competitive environment (Larson, 2009). Henry Mintzberg’s Comment on Business Strategic Management Henry Mintzberg has said, “All [business] definitions, no matter how tangible, are ultimately concepts that exist in the minds of actors and observers” (Voyer, n.d.). Concepts are a type of intellectual model. Mintzberg's statement infers that “a reasonable first step in making strategic change is to change mental models about the business”. Starbucks has been in the market for quite a long period of time and they also had to change the mental models of the business to adapt to the new business environment (Voyer, n.d.). Mintzberg and his associates have recognised variety of approaches of strategy that includes the strategic planning and its alternatives. One approach provides emphasis to strategy as the analytical point of products in a market and another as a cultural procedure of combined decision making, negotiation of power as a vision and a process of organisational transformation. Starbucks’ strategy has been to import coffee from various nations as well as from the domestic market to offer the best quality coffee (Morrill, 2007). Mintzberg gave emphasis upon strategy as a form of learning in the context of emergent strategy. The emergent strategy is the combination of both formal analysis and intuitive considerate of promising instructions that emerge in the general course of business. Mintzberg stated that common strategic idea is the accomplishment of competitive advantage in the market place through the formation of discriminate and sustainable value for shareholders. This was applicable for Starbucks too as it offered its employees to become the shareholders (Morrill, 2007). Mintzberg have provided five coordinating principles for the managers in development of strategies. Mutual Adjustment The technique is applied in smaller organisations. Mostly informal communication is used and coordinated through informal process of communication. The level of service in Starbucks can be achieved through the informal contact with the consumers (University of North Carolina, 1998). Direct Supervision In this approach, responsibility is taken by an individual and the first-line supervision is applied. Each responsible person performs different types of task. In the Starbucks’ stores there are collective managers who take care of the entire store with single responsibility (University of North Carolina, 1998). Standardisation of Work Processes The coordination is accomplished through specific process through which the work can be performed. Certain part or work process is standardised to coordinate the work. The standardised process in delivering service to consumers can be enhanced and standardised form can be achieved that will help Starbucks to coordinate properly. This is evident in the service standardization of the stores of Starbucks. The level of service has been standardized to achieve high level of consumer satisfaction (University of North Carolina, 1998) Standardisation of Outputs Coordination of the product or service is achieved by determining the final result or outcome of the work (University of North Carolina, 1998). Standardisation of Skills Through standardisation of training, coordination is achieved. Through the standardised training of the employees of Starbucks the level can be achieved. This will help in performing and coordinating properly. In Starbucks, there are training provided to all the employees regarding the service and the maintenance of the quality that will delight and generate loyal consumers (University of North Carolina, 1998). In ‘The Rise and Fall of Strategic Planning’, Mintzberg has provided evidence for the failure of strategic planning process. There are many reasons like process, system and other reasons that led to failure of strategic planning (Gregory, n.d.). Richard Whittington Comment on Business Strategic Management Whittington has provided generic perspective on business strategy. Whittington provided four concepts of strategy, classical, evolutionist, processualists and systemic. (Papadopoulos, n.d.). The classical school of strategy is characterised by Michael Porter, based upon the understanding of strategy that is developed by means of premeditated procedures and search for long term maximisation of a company’s profit. Even Starbucks has developed long term strategy for the future prospective market to expand the stores in various regions (Papadopoulos, n.d.). The evolutionist school approve the strategy as the profit seeking objective, but is incredibly pessimistic about the capability of companies to prepare actual effective strategies. The demand of the stakeholders and the decision of managers are coordinated for achievement of the objectives. The increase in the level of shareholders’ equity earning of Starbucks has proved the efficiency of the stake holders with the managers (Papadopoulos, n.d.). The processualists, as epitomized by Mintzberg, concur with the futility of long-term planning. This strategy though is more voluntarists in their approach to the capability of organisations to perk up environmental fit (Papadopoulos, n.d.). The symbolic school characterised by Michael Albert, states that strategy serves numerous purposes and the reason for this is the different social system that operates within the organisation. Starbucks had its own culture which promoted coffee consumption while relaxing (Papadopoulos, n.d.). The classical school observe strategic choice as an independent and basic initial move in strategy. The techniques for creating such assessments are companionable with the revenue maximizing objective, that is, quantitative analysis of cash flows, (NPV) net present value and so on. Starbucks has experienced increase as well as decrease in the revenue and sales and has reacted with the changes in the marketing trends (Papadopoulos, n.d.). The empirical research does not agree with the classical school in quantitative tools and relevant rules. There is a modest proven agreement among managers on how to accurately compute profitability (Papadopoulos, n.d.). Processualists believe that the importance of strategic decisions is exaggerated. Decisions at times are not taken deliberately but it occurs by chance. According to this strategic approach decision making is far beyond just unsystematic meetings of probability problems along with preferred solutions (Papadopoulos, n.d.). According to Nelson and Winter, strategic decision makers perform like skilled drivers who acts in response instinctively, an alert decision might really damage the decision. In other words, decision choices are submerged in routines. To comply with the changes of the marketing environment, Starbucks has undertaken promotional activities and expanded with the growth in different markets (Papadopoulos, n.d.). Applying the four basic theoretical approaches of strategy-choice making to a series of important strategic matter would facilitate the business to evaluate practical inference of the diverse theories in real situations. Business leaders are confronted to significantly estimate their own personal advancement to strategy decision making. This way, an individual can efficiently make use of the dissimilar theories of accomplishment applicable to their business (Papadopoulos, n.d.). (B) SWOT Model for the Strategic Decision (Regent University, 2004). Strengths The corporation has been able to increase the sales force and has achieved in generating more than $8180 millions in 2009. The financial conditions of the corporation are strong enough to fight the financial challenges in the competitive environment. The increasing trend in the revenue has made the corporation more attractive in terms of investment by investors (Starbucks Corporation, 2009). Starbucks has been able to develop its coffee brand in the global market and due to its quality coffee products and high quality of services. It has built a positive reputation in the market that has enhanced the brand image and value in the international as well as in the domestic market. The quality of the products and services has made Starbucks popular and achieve the high competitive advantage in the market through the products and services. The product quality and service level of Starbucks have been the strength of the corporation. The corporation has been maintaining the strategy in providing high quality of coffee products and services in every store of Starbucks. The strategy of maintenance of high quality of services and products are highly competitive and requires lot of attention in maintaining it. Weaknesses Consumers have a perception of Starbucks about having a strong competitive advantage of innovative product development. Starbucks is known for the new product development. There is every possibility of failure of the product as consumers’ tastes and preferences are continuously changing and it becomes very difficult to meet the expectation of the consumers. The failure of the product will have a negative impact upon the brand value and the image of the corporation. The corporation holds a strong position in the market of the United States of America. But the corporation has not looked at the portfolio of the risk diversification of the business. The company should access the other potential market and develop strategy for operating in those potential markets to reduce the business risk. The corporation is based upon the retail coffee store format and largely depends upon this format. For future diversification of business, the company will face many problems. In recent times many business houses are diversifying their business operation to gain maximum advantage and benefit. Opportunities Starbucks has been able to develop the potential products and services that are well accepted in the market. With the strategy of high quality of products and services the corporation should enter into the potential market. There are many potential markets that are emerging in recent times. Before the competitors enter into the market, Starbucks should tap the emerging growing economy of the potential country. The strategy should be to focus upon the expansion plan in the potential markets. New products and services that can be applied in this current retail store format like trade shows should be used to attract more consumers towards Starbucks. The opportunity of the market should be taped through the trade fairs and shows that will add benefit to the corporation in terms of revenue, brand loyalty and generate more loyal consumers. Threats The market risk can be assessed up to a certain level but beyond that it is not possible. It is uncertain that whether the changing consumers’ consumption will favour coffee beverage in future or not. The consumption of the person’s habit might change towards other beverages or certain other products might replace the coffee. The rising price of the raw materials might impact the pricing policy of Starbucks. The re-structuring of the pricing policy might increase the prices of the products and services that might affect certain category of consumers. Starbucks should prepare the strategy to maintain an effective cost policy that will minimise the costs through different tools. Even the prices of the raw material increase the cost that can be controlled through other mechanism. Starbucks was established in 1971, in Seattle. Since then there have been many corporations that have developed the similar kind of retail formats. They have followed the business model of Starbucks and have entered into many markets making the market more competitive and entry of Starbucks in those markets became difficult. The company can look forward to follow expansion strategy in the potential markets before the competitors enter these markets. The level of threat will be minimised if Starbucks enter the market and develop business there with the strategy of high quality product and service format. The potential threat of cost can be minimised with the application of cost / effective program that will help Starbucks to maintain the cost of the products and services at the similar level as the rising price might make the corporation to lose business. The strategy of expansion in potential market will reduce the risk or diversify the risk and help the corporation to grow. Porter’s Five Forces Model in Developing Strategy (Lima, n.d.). Internal Industry Competition The marketing strategy of Starbucks is to establish its outlet where consumers can relax and spend time. Many of the coffee retailers have adopted this model and have raised the level of competition in the industry. Companies like Dunkin Donuts, BIGGBY Coffee, Panera Bread, Einstein Bagels, McDonald’s Corporation and 7-Eleven are the biggest competitors of Starbucks. Competitors like McDonald’s and Dunkin Donuts are intense competitors. They have huge menu items and sound financial system that are the strengths of these companies and are threats to Starbucks. The strategy of Starbucks should be focused upon the development of the product and level of services. This strategy will make the brand grow and provide huge competition to other competitors. The biggest strength of Starbucks is the quality of products and service that the corporation should focus upon and develop strategy in building strong brand value and product that will be able to compete with other competitors. Threat from New Entrants There is every possibility of threat from new entrance in the market of the US. The industries already have many competitors in the US market and more competitors will saturate the market. This saturated market will not be favourable for Starbucks. The strategy of Starbucks should be to develop strong brand value and perform certain promotional activities. Starbucks do not perform promotional activities; they generally sent the offers through e-mails to the consumers who are registered with Starbucks. Starbucks need to do a bit of promotional activities as competition is getting intense. The market for coffee is huge and especially the formats for coffee and leisure hour for relaxation like Starbucks are famous. Now, if any other corporation opens up in the market in the same format, there is every possibility of conversion of consumers from Starbucks to the new corporation. To minimise this, Starbuck strategy should be focused upon the level of service that will maintain the loyal consumers and generate more consumers towards it. Substitutes Effect The beverage market is increasing as various beverage items are being increasingly demanded in the global market. The substitute effect of beverage market upon Starbucks is huge. As consumers want differential beverage products the coffee consumption might witness a decline. The substitute’s effect is also prevalent in the form of competition. McDonald’s have entered in this category and offer differential beverage drinks that are accepted by the consumers. The company has huge financial support system that might develop innovative beverage items. This might affect the sales of Starbucks. The local market has also been a substitute threat as they offer diverse beverage at various prices that effect Starbucks sales. The premium category products that are available in local market cannot give tough competition to the Starbucks coffee. Starbucks is famous for the high quality coffee and services that cannot be replaced. Consumers are loyal to its brand due to its high quality coffee and services. Bargaining Power of the Buyers Starbucks have the premium pricing policy strategy that offers the consumers with high quality of coffee and services. Even with the premium pricing policy strategy Starbucks has been able to provide value addition to the consumers. The bargaining powers of the consumers are low in Starbucks. There are many coffee retail stores with similar and different formats. The switching power of the consumers is largely depended upon the pricing policy. The consumers can switch to another corporation. Starbucks premium pricing strategies have generated huge loyal consumers and attract more consumers with the high quality of coffee and service. The switching cost is low in the case of Starbucks. The brand values of Starbucks have been able to create many loyal consumers and are still attracting more new consumers. Bargaining Power of the Suppliers The raw materials are purchased not only from one country but are imported from various countries to provide the finest coffee. The negotiations of the suppliers depend upon the quality of delivery of coffee beans to Starbucks. The bargaining power of the suppliers varies with regards to the supply of raw materials. The coffees imported from different nations have different suppliers; and on-time or just-in-time delivery makes the negotiation power of the suppliers’ higher (Ehmke & Et. Al., n.d.). The switching cost of the suppliers is a costly affair to Starbucks. The power to negotiate depends upon the availability of the raw materials and on time delivery. (C) PESTEL Model and Strategic Approach Political Starbucks deals in speciality coffee. There were lot of political support for the production of coffee in the US. As trade fair related to coffee became popular in the United States, there were number of organisations that sprung up in order to promote and also raise awareness and raise it to a level in which it can be considered as speciality coffee (Tuck School of Business, 2002). The government of the US have analysed the coffee market and encouraged coffee production and consumption. The main motive of the government was to export coffee in the global market that would increase the growth of the US economy. Starbucks had received the benefits because it started in 1970 as the coffee production and consumption gained its importance nearly after ten years which made the market more favourable for Starbucks. Starbucks had the opportunity to minimise the cost of raw materials by dealing with the local and domestic market suppliers. As there was an increase in the coffee production, Starbucks had its market for procuring high quality of coffee beans (Tuck School of Business, 2002). Economical The economic conditions at the inception phase of the corporation did not have the positive impact. Later on, when the market conditions were improving, the economic conditions also improved and thus, Starbucks was benefited. The premium pricing strategy of Starbucks made them generate huge business throughout the years of operations. The economy of the coffee production and consumption grew and Starbucks was able to attract the market forces and this helped the corporation to be in a leading position in the coffee service industry. Coffee is the second most trading product on the global market. According to Luttinger and Dicum, “Coffee is grown in more than 80 tropical and subtropical countries, employs an estimated 20 million rural farmers, and is the principal source of foreign exchange in many countries” (Luttinger & Dicum, 2006). The economic conditions are favourable for the coffee market and Starbucks has been able to capture the market with the premium product and quality services. The average consumption of coffee per capita in the US market is about 4.4Kg. The average coffee consumption in the US market is around 3.1 cups of coffee per day (Coffee Research, 2006). The potential growth in the economic condition with premium pricing strategy of Starbucks had made the corporation successful. Socio-Cultural According to Wu, “Different types of coffee, drunk in different ways, have different social and cultural implications, for example, in terms of status” (Wu, 2010). Starbucks have been providing high quality of coffee at a premium pricing strategy that implied the status of the consumers. The culture of consuming coffee in a relaxed mood in a retail format store encouraged the consumption pattern of the consumers. Starbucks was able to generate the culture of coffee consumption. Many people of various age groups enjoy coffee with friends, relatives, colleagues and other peoples. The space and the ambience of relaxed mood that were provided by Starbucks created a culture in the society of coffee consumption pattern. Consumers feel esteemed being associated with Starbucks and enjoy the service and high quality of different coffee. Technology Starbucks have been attached with many numbers of firms that were providing technical solutions that served the consumers of Starbucks at a higher level. Starbucks has provided an extra cashless payment terminal that enables single-cup coffee brewing machines that are designed for the business offices (RFID Journal, 2010). Starbucks has been able to apply the technical aspects efficiently to enhance the service level to deliver full satisfaction to its consumers. Environmental Mellissa Allison observed, “Starbucks customers who care about the environment ask first about the paper cups” (The Seattle Times, 2010). In response to the healthy environment, Starbucks use the biodegradable material in replacement of plastic. Starbucks apply the strategy of recycling that provides the positive image of the corporation upon the society and consumers. Starbucks has been able to recycle many materials from the Starbucks store in the US. The major problem with the environment factor was the program of recycle. Many locations or regions did not have recycle programs and Starbucks had to face the problem of collecting the materials and then transfer to other place for recycling. Starbucks strategy has been to “increase the percentage of stores that recycles” (The Seattle Times, 2010). With expectation of the environment issue, Starbucks’ strategy is to expand more energy efficient stores. Starbucks also wants to expand new stores in the US, the UK, and Germany and Canada market that will be certified as “green” by the US Green Building Council (The Seattle Times, 2010). Legal The legal challenges that Starbucks might face is related to the import laws. Change in the import laws will affect the import of coffee beans. Starbucks’ import quality coffee beans from different regions and the change in the import laws will have a direct effect upon the pricing of the raw materials. Starbucks needs to develop the strategy that will be able to minimise the cost in other ways if the import law changes which is not favourable for the business. The cost effective program will be helpful in managing the business cost efficiency. Marketing Mix of Starbucks Total U.S. Retail Coffee Market (both in-home and out-of-home consumption): (Tewell & Et. Al., 2006). In the home consumption, it is seen that Starbucks have done a $3.2 billion business and have a 4% share. In Specialty coffee segment Starbucks have done a $5 billion business in the food service channel and have a 5% market share (Tewell & Et. Al., 2006). Starbucks’ product mix extended from 30 varieties of entire bean coffees to ecological cappuccino, and other Starbucks paraphernalia and coffee makers. Its product contributions have extended beyond coffee to oatmeal, to pastries and wraps, to fight with the competition and satisfy more consumer needs and requirements. Starbucks’ products are priced higher for the perceived glamorous representation attached to its brand. The company has also implemented value strategy that emphasises on reasonably priced coffee products because it is being perceived as high-priced to price-skittish consumers. The outlets are generally found in-store of various large chains stores. Starbucks’ locations are enormously favourable for individuals, who enjoy listening to music or reading books. Starbucks stores are found where there is high traffic of people. Starbucks implemented lot of promotional activities to attract more consumers. Starbucks Card is a scheme that recommends consumers to endorse company's merchandise through a referral system. When a consumer procures a gift card, it demonstrates brand loyalty and also offers the corporation with free of charge advertisement and also attracts new consumers. Conclusion Starbucks has been successful as a coffee chain of restaurants in many places. Starbucks has been expanding its business where there is a potential market. But due to other factors affecting the business and the brand value, the company has closed all the non-performing Starbucks stores in the US as well as in the international market, which has increased the profitability level. Starbucks has been getting involved in public relations and promoting a responsible corporate image towards the commitment that Starbucks has made towards the society. The rapid expansion of the retail operations, growth in its specialty sales and other operations, availability in various places, reputation, consumer service and high quality of product are the key success factors of Starbucks. References Coffee Research, 2006. American Coffee Consumption Trends. Coffee Consumption Statistics in the United States. [Online] Available at: http://www.coffeeresearch.org/market/usa.htm [Accessed November 25, 2010]. Ehmke, C. & Et. Al., No Date. Industry Analysis: The Five Forces. 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