Strategic Management at Starbucks - Case Study Example

Strategic Management: Starbucks Name Institution Date Strategic Management: Starbucks Introduction Starbucks has gone through three important stages during its development. The first stage was that of continual growth that was fuelled by popularity of the special coffee products that was offered and development of a strong culture guided by strong core values and a focus on the customer and the society at large. This stage was followed by a drop in sales and later, its fortunes were restored with the return of former CEO, Schultz. Starbucks developed various strategies that enabled it to begin its restoration. These strategies included introduction of new products and elimination of some of the stores across the world market. Despite the success attained by the returning CEO, there were still concerns about the strategy used by the company. These were concerns on the same issues that had caused worry among investment analysts back when the company started declining in sales. This paper analyzes issues facing the strategy developed by Starbucks. The paper shall identify the issues facing the company, analyze and evaluate these issues and make recommendations on the best way forward. Identification of strategic issues and problems Current situation The strategy used by Starbucks involves the creation of a global presence for the company’s empire through engaging in diversifying its products by use of vertical and horizontal integration and at the same time, keeping its high corporate strategy. The company has been investing in expanding its reach beyond the coffee bar sector and working towards more diverse sectors like instant coffee, tea, music, confectioneries, books, mugs and many other sectors. Through this, the company was able to maintain a steady stream of revenue from various fields while maintaining coffee as their core business. This strategy of diversity was through the revelation that the company was a core coffee firm but not an only coffee firm. In a world where new market segments are turned out every day, this strategy is one that can help the growth of a company. Through diversity, the company has developed new products that are used to keep up with the changing market trends that are the source of profit for certain segments. An example of the advantage of this strategy was seen during the healthy trend of living that developed between 2007-08, where Starbucks developed yoghurt parfaits, fruit cups and skinny lattes. This strategy enabled the company to get into a customer segment that had been wary of Starbucks’ caffeine based products. With an ability to react to the changing environment, Starbucks can be defined as an innovator in the industry (Schultz, 2011). To attain a competitive advantage over its competitors, Starbucks uses a broad differentiation strategy (Abraham, 2006). The company has ensured that one needs not to love coffee for them to visit Starbucks because of the wide range of products that are offered extending beyond coffee. The company is able to reach a variety of market segments because of the high quality products. In addition, the company has used the strategy of vertical and horizontal integration. The company created a great reputation with high quality products that have enabled it to translate the loyalty of its customers into a customer base that is loyal to each of its products. The company conducted extensive research on the needs and future trends of its customers and this enabled the company to meet the changes that occurred ahead of time, giving the company an advantage as a first mover in the market. Every product sold by the company has been seen as an extension of the company. Through these strategies, the company was able to expand and widen its market share, making it a leading service provider in the beverage industry (Bensoussan and Fleischer, 2008). SWOT Analysis of the company Strengths Weaknesses Its business philosophies, including the core values and education of customers on the qualities and values of fine coffee Leadership with vision Strong presence of Starbucks brand in the global market Strategic initiatives and efforts of execution that rejuvenated the company Shortage of necessary infrastructure needed for managing large scale operations i.e. equipment, facilities and logistics Change of leadership led to change of strategic focus, from customer service to service efficiency Long periods of training required by management so as to understand the company’s policy and strategies Opportunities Threats The company got into licensing agreements with retailers and this enabled it to go into areas and locations that were out of reach, leading to international expansion Development of partnerships with companies to facilitate creation of new products related to coffee A loyal customer base, loyal to products other than coffee Complacency after the phenomenal success, hence slowly spiralling down and lacking the ability to think forward and adopt a flexible approach in making decisions The ever changing global environment threatened the company due to uncertainty and volatility of the market PEST Analysis Various political factors affect the company both nationally and internationally. Factors such as the USA withdrawal from international coffee agreement used to set limits on exported coffee impacts on the operations of the company (Thomson, Shah and Thomas, 2006). The stability of countries, especially coffee producing countries affects operations of Starbucks since farmers within those countries can concentrate and produce their own quality coffee. Economical A high rate of inflation in countries where the company conducts its business affects its sales because of loss of potential customers who might not be able to afford the products. Starbucks exports coffee to various countries and the fluctuating rates of exchange affect the profit margins of the company. The rate of economy growth in countries where Starbucks operates affects the purchasing power of consumers and this leads to a decrease in coffee demand. Social Coffee has been accepted across every society and this has made it easy for Starbucks to sell its coffee across the various regions. In addition, the company has tapped into the products that are highly adorable in the society, making this a great opportunity to avail the products to clients when they are having an easy social time. Use of a powerful social corporate responsibility tool has enabled the company’s products to be highly accepted because of an enhanced accompany brand name. Technological Use of technological advancements such as the advancements in information technology promotes the efficiency of operation of the company. For instance, the company was among the first companies to make use of social media as a marketing tool. Through advanced technology, the company has been able to improve on the research and development team. Porter’s five forces The bargaining power of suppliers is low since the suppliers rely on the industry to get revenue, yet coffee beans are grown in over 70 tropical countries. The use of a fixed fee agreement protects the company from this power. Coffee beans are sourced from different geographical locations so as to avoid increase in prices due to changes in economic, political and weather conditions. Buyer bargaining power has been low because of individual customers who cannot influence the operations of the company. The threat from substitute products can be seen to be a high risk due to the low cost of switching. Substitute products are available to the consumers at a competitive cost or lower cost than that offered by Starbucks. Peng (2005) stated that because of substitute products, companies have to provide products that much up to those substitute products. Entry of new products into the coffee industry faces a low barrier and this implies that the company faces a challenge of new products in the market. Finally, competition from rivals forms a high threat to the company. This is because competitors create competition in terms of price and quality products. With the many products offered by Starbucks, competition from rivals is fierce. Key issues and problems in the company’s strategy One of the main issues facing the company is oversaturation of the market. The company has undergone aggressive expansion with many shops existing in the same neighbourhoods. This has the effect of diluting the experience of the store and leading to self cannibalizing stores. In addition, the strategy of diversification has worked for the company in one way, and worked against it in another. This is because going into other business products like grocery places the company in a field that immensely competitive and calls for new capabilities. Further, development of other products such as instant coffee poses a threat to the brand of Starbucks. One of the strengths of the company lies in its great brand name. Therefore, a threat to the brand name is a threat to the business. The company has also lacked coherence and consistence in its strategy. This was evidenced by the shift in strategic focus from the customer to efficiency of operations when a new CEO took charge of the company. With a consistent strategy, the company should have maintained its focus on the strategy of customer focus. The company’s strategy of pursuing multiple initiatives is a distraction to the focus of the company on its core identity. In fact, the company loses a clear identity through the many ventures that it has. This implies that the company has no specific product that it offers; rather, it is a multi-product company. The strong competitive advantage that the company enjoyed was lost when the company ventured into various products. With the changing market, the competitive forces become stronger every day. This implies that the company faces the challenge of handling very stiff competition in products that it does not consider as its core products. This implies that Starbucks cannot compete favourably with companies that offer the same products as their core products. Starbucks’ strategy of providing multiple products to its customers is a challenge that calls for provision of equally high quality products such as those provided through the coffee products. Analysis and evaluation The financial ratios of the company are stated as below between 2005 and 2011. 2005 2006 2007 2008 2009 2010 2011 0.9855 0.7903 0.787 0.7982 1.287 1.24 1.20 These ratios are not close to the ideal value of 1:1. Source: Grant, 2012. The ratios indicate an improved performance of the company over the years. This indicates good financial performance of the company. In addition, the company has the resources to launch stiff competition in its market segments. This is attributed to the reduced number of stores while retaining the resources used to run the company. With the marketing tools used by the company, and adoption of necessary technology, the company has the ability to overcome the strategic challenges it faces. Recommendations Starbucks should reduce expansion of stores and continue its focus on corporate social responsibility, local offerings and involvement in the community. This is a strategy that was the driving force behind the success of the company. This can be done by utilizing the customer loyalty they enjoy and identifying individual customer needs so as to utilize a differentiated strategy in providing local products that shall be suitable to its clients (Quelch, 2006). Use of local products makes the company appear as a neighbourhood shop. In addition, the company should focus on enhancing its brand name by sticking to its core products. This strategy has the benefits of creating identity and it will eliminate the problem of lost identity that the company is bound to face. This can start by eliminating the other products such as books and mugs, and focusing on its core business. Finally, the company should revise its key strategies and use it to align the business objectives. This shall create consistence and eliminate any incoherence that existed before. The company should state the core values that guide it to success and stick to them, even when there is a change in regime. This shall create a leadership culture that will sustain the company (Meangreen, 2014). Conclusion Starbucks has been faced by various challenges after it began facing decreased sales. With the return of Schultz, the company’s position was seen to improve. One of the strengths of the company lies in its strong brand name and loyalty from its customers. This was achieved through a great corporate social responsibility that was attained through a focus on the customer. In addition to customer focus, establishment of the company back to the golden days should be based on development of specific products that shall be identified by the company. This shall further enhance the company brand. Bibliography Abraham C. S., 2006, Strategic Planning: A practical Guide for Competitiveness Success, Bingley: Emerald Group Publishing. Bensoussan E. B., and Fleisher S. C., 2008, Analysis without paralysis: 10 tools to make better Strategic decisions, USA: Pearson Education Ltd. Grant, R. 2012, Cases to Accompany Contemporary Strategy Analysis, USA: John Willey and Sons. Meangreen, 2014, Starbucks Strategic Analysis and Assessment (New economic strategies to stay ahead of coffee competitors), Retrieved on 2014-06-08 from: http://meangreen.hubpages.com/hub/Starbucks-Analysis. Quelch Y. M., 2006, Starbucks: Delivering Customer Service, Boston: Harvard Business School. Peng W. M., 2008, Global Strategy, USA: South – Western Cengage Learning. Schultz, H., 2011, Onward: How Starbucks Fought For Its Life without Losing Its Soul, USA: John Willey and Sons. Thomson A. A., Shah J. A., and Thomas F. H., 2006, Starbucks’ Global Quest in 2006: Is the Best Yet to Come? UK: McGraw-Hill. Read More