Starbucks - External Analysis - Case Study Example

CONTEMPORARY TRENDS/COMPETITOR ANALYSIS REPORT (Name) (Institution) (Course) (Instructor) (Date of submission) Background Starbucks is the world’s leading roaster and retailer of speciality coffees with annual sales hitting $10 billion in 2010. The firm was founded in 1971 by three men, Jerry Baldwin, Zev Siegel and Gordon Bowker, who had common interest in fine coffee and tea. By 1987 there were six stores in Seattle all selling roasted coffee beans for clients to brew it at home with minimal brewing done for tasting purposes. Currently, the company operates in over 50 countries with over 8812 company-owned stores and 7852 licensed stores. In 1981, a former top executive with a Swedish kitchenware firm, Howard Schultz, met the founders of the firm and expressed his interest in the firm and provided them with numerous proposals for growth. Schultz formally joined Starbucks as head of marketing and also head of expansion plans in September 1982. After serving there for several years and overseeing the opening of new outlets and incorporating coffee brewing at the various outlets, he left Starbucks to form Il Giornale store with the first store opening in Seattle in 1986. Later, on he acquired Starbucks and renamed the firm Starbucks Corporation (Thompson et al 2012). The new Starbucks took to rapid expansion with Schultz as the CEO. The product range was expanded to include premium coffee brews. Numerous stores were opened all over the US. Nearly all the stores superseded their expectations in terms of customer traffic and revenue. To expand even more geographically, the firm took to licensing as opposed to franchising to other firms such as Marriot Host International and Aramark Food and Services. The firm positioned itself in the market as the “third place” after home and work. Ambience, high quality coffees and staff friendliness were marked as the main pillars of the firm’s growth. The firm relied more on word of mouth as opposed to paid advertising and used their stores as advertisement. All stores were designed based on four major design platforms. Added services such as free wi-fi internet were included in the company owned outlets. Several acquisition and strategic alliances with firms such as PepsiCo and Kraft Foods enabled the firm to expand into the ready to rinks beverage market and also in the foods markets. As for the acquisitions, the firm entered into the music industry through selling music CDS and digital music through iTunes. It expanded into the UK, China, Japan, Canada, Australia and other countries. However, operations in Australia were reduced significantly in 2008 (Thompson et al 2012). This was also followed by a new vision “to inspire and nurture the human spirit – one person, one cup, and one neighbourhood at a time” while its vision is “to become an enduring, great company with one of the most recognized and respected brands in the world, known for inspiring and nurturing the human spirit” (Thompson et al 2012). This indicate the firm’s new intended direction. External analysis The external business environment comprises of various elements such as the legal, political, economic, competition, technological and social-cultural (Grant 2007). In strategic management, individual organisational decisions have to be linked and continually adapted to business environmental changes. In the modern globalised word, the challenges for MNEs have increased not in numbers but in complexity making it harder to forecast the future. Cantwell, Dunning and Lundan (2010) believe that the greatest challenge lies in the informal institutions such as culture. For this reason, firms have to formulate and implement strategy based on special techniques, frameworks, concepts and abound with intuition and experience in business. This should be geared towards attaining competitive advantage by responding to changes in the external opportunities and risks and internal capabilities. Ideally, strategic management in the global context is harmonizing business decisions to a globalised environment. For Starbucks, the harmonization process has been rather successful as discussed in the case study. Starbucks’ strategy has been largely influenced by the industry environment. The changes in the global business environment have had positive and negative influences on the firm (Grant 2007). The responses made by organisations to such dynamic changes simply differentiate between failure and success in the market. For Starbucks, the responses to such changes have largely been positive leading to positive results and restructuring in 2008. The major driving forces in the coffee industry are changing product innovation, societal concerns, attitudes and lifestyles, growing buyer preference for differentiated products, and increasing globalization (Talpau & Bascor 2011). Product innovation has been a hallmark of Starbucks’ success in the global market. The firm has been continuously innovating new products and incorporating new technology effectively in innovating way better than any of its rivals. Innovation serves two major purposes in organizations; to attract new customers by introducing a wider product range than the current product mix and secondly to differentiate products from competing products (Grant 2007). For Starbucks, the firm has ventured into many industries through joint partnerships with a number of players. Early on, the introduction of coffee culture through coffee bars by Starbucks sought to create a new “product” in the experience of coffee consumption. Starbucks has been very successful in the face of stiff competition in nearly all the products that it has introduced in the market mainly due to its strong brand equity. Keller (2000) writes that firms with strong brand equity benefit from customer loyalty and higher profits. Nichols (2006) claims that earlier approaches to business strategy namely, military, combative and mechanistic, as proposed by Mintzberg, Quinn and Ghoshak (1997) are limiting. Any approach, military, combative or mechanistic would attribute Starbucks success on capitalizing on the weaknesses of the opponents or competitors. These approaches are based on the assumption that since there are rarely “virgin” markets, new players in an industry have to identify the gaps left behind by the existing players which proponents of the approaches term as the weaknesses of the opponents. Nichols (2006) cites Mintzberg, Quinn and Ghoshak (1997) who say that “Effective strategies should….concentrate superior power (vis-à-vis) opponents at a place and time likely to be decisive …(they should allow) for flexibility and manoeuvre while keeping opponents at a relative disadvantage …(and make) use of speed, secrecy and intelligence to attack exposed or unprepared opponents at unexpected times …”. Keller (2000) also disputes the ‘outdated’ approaches at indicates that products sell not because they are a collection of attributes but because the product present a desirable whole which is inclusive of the collection of attributes, brand image, service and other intangible elements. In this light, the fact that Schultz introduced a wider aspect in coffee consumption in the US added more to the collection of attributes of premium coffee. The sense of community and romance witnessed in Italian coffee bars was replicated in the US, UK, Australia and other countries and produced wonders. Position of the organisation Starbucks story in Australia has been mixed. Business critics have often labelled Starbucks as a failure in Australia when compared to the success of the brand in other countries. Since making an entry in 2000 by opening its first outlet in Sydney, Starbucks struggled to expand with new stores operating just above average (Thompson et al 2012). The premium coffee consumer market in Australia was hard to penetrate as it had a unique culture which Starbucks failed to understand well and also because the market was already dominated by several brands. Rapid expansion strategies between 2000 and 2008 that saw 84 Australian stores did not bear the desired fruits. In 2008, at the height of the global financial crisis, Starbucks closed 61 stores in Australia within one month. Operations retained in the country’s’ three major cities, Sydney, Melbourne and Brisbane which shared 23 stores that remained. The same failure was reported in Israel. So what went wrong? As an MNE, Starbucks has largely generalised its approach in premium coffee marketing by seeking to create a whole new experience in premium coffee consumption. For this reason, Starbucks believed in charging premium prices for premium products. While this strategy had worked in other markets, it did not work out in Australia. This is in spite of Australia having a number of well performing Italian coffee bars and other popular brands such as de Gloria Jeans, McCafe and Hudsons Coffee, according to IBISWorld industry report (Franchising 2011). While Starbucks seemed to have mastered the art of dominating and expanding into new markets rapidly, the strategy failed in Australia. This points out to transnational barriers and socio-cultural issues facing MNE’s. Cantwell, Dunning and Lundan (2010) note that a majority of MNE’s use a generalised approach in global business with little attention given to detail which may not work well in countries with large cultural distance from the organizations home country. Patterson, Scott and Uncles (2010) plainly put it that Starbucks failed to carry out extensive research in the Australian market. They say that Australian coffee consumers are loyal to individual coffee baristas as opposed to a company or product brand. SWOT Resources Internal Environment and Tangible and intangible resources Strengths Weaknesses Opportunities Threats Firm Infrastructure -Financial resources -Organisational resources Physical resources -Large financial asset base -Focus on sustainable development -World’s best located coffee stores in high human traffic areas -Starbucks investment in coffee growing to support farmers in developing countries costs the firm a lot of money. Convenience of ownership and flexibility in store design Real estate price fluctuations HRM -Training and development -Knowledge management -Trust -Managerial capabilities -Staff retention -Numerous training programs for staff especially baristas. -Human capital planning to maximise the value of their people. -Difficulty in retaining staff during recent turbulent economic climate. -Lay offs lead to knowledge drain and erodes human resources Growing labour costs Technological development -Technological resources Innovation -Scientific capabilities Capacity to innovate -Best computerised coffee bean roasting systems -Advance coffee farmers training programs -Advanced coffee roasting variation to create diverse tastes -Rapid changes in technology rendering some obsolete Wider product range High quality products Increased all-round efficiency High expenditure in R&D Procurement Strong Procurement policies Difficult to thoroughly control all procurements for licensed operations Bargaining power Economies of scale in procurement Increasing global prices Operations Diverse range of products hence in strong position to cater for demands of the market. Presence in many countries Some products under perform Various countries have unique market needs Wider market reach Exposure to higher competition in foreign markets Marketing and sales -Strong brand equity -Strong brand recognition -Reputation with customers Provided the medals for the London Olympic games, also has strategy on community engagement. Community involvement Market perceptions pertaining to overpricing Higher Brand exposure Higher costs in advertising Competitor analysis Data on the Australian coffee consumer or the Australian market show some unique qualities which Starbucks my not have anticipated. A number of scholars point to the failure of Starbucks to understand the Australian coffee consumer well, a number of themes arise. As a high income country, Australian consumers are more price sensitive than their counterparts from high income countries and do not necessarily link high higher prices with higher quality. It is for this reason that premium coffee consumers in Australia were not willing to pay more for Starbucks product retailing at a higher. However, Starbucks retains 23 stores in three cities which operate and compete effectively with other players. Roy and Chau (2011) explain this by saying that high-status seeking consumers are more willing to identify with global brands as opposed to low-status seeking consumers who are more willing to identify with local brands. Another explanation could be that Brisbane, Sydney and Melbourne have a high population of foreigners and tourists who are loyal and already accustomed to the Starbucks pricing and product offer from their home countries as global brands are more popular with non-Australians. Its operations in Australia prior to the restructuring in 2008 were not customer oriented. Talpau and Bascor (2011) insist that a customer orientation implies that an organization’s set of beliefs is towards meeting customer needs and satisfaction. In the case of Australia, the major cause for failure is that the firm failed to justify or respond to the concerns about higher prices effectively. Patterson, Scott and Uncles (2010) claim that the fact that baristas and sales people at Starbucks stores were given daily sales target hampered the engagement that was required with clients since the firm’s ideal was to serve people and not just coffee. Contemporary trends Starbuck’s roll-back in Australia and other international markets was triggered by 2008/09 global recession. Aggregate global demand had fallen and businesses were making losses as a result of decreasing sales and increasing difficulties in accessing funding. The high inflation rates were eating on profits and many firms, Starbucks included, were forced back to the drawing board. This indicates that global financial fluctuations have a far reaching effect on the strategy options available to MNCs. How individual governments reach to such determine the performance of firms such as Starbucks (Patterson, Scott & Uncles 2010). Such moves greatly boost aggregate demand and enable easier accessibility of funding for such firms. Another macroenvironment issue facing MNEs arsing from Starbucks case in Australia is market research on social cultural influences. The firm failed to identify a target market and failed to acknowledge Australians perception on premium pricing. The fact that the company was targeting the whole lot of Australians in the belief that the Starbucks euphoria experienced elsewhere could be replicated in the country. As an English speaking nation, Starbucks assumed there was little to no cultural difference between Australians and other English speaking markets such as the US and the UK. The common trends adopted by other players are key on playing to the local tastes and lifestyles (Patterson, Scott & Uncles 2010). Conclusion The manner in which Starbucks has performed in Australia does not point to the overall picture of the global firm. While it has been very successful globally, the Australian markets present unique challenges that the firm did not anticipate and plan for very well. The firm still holds a combination of resources and strengths that can push it upwards in the Australian market. However, the context of the Australian market needs to be put into consideration if Starbucks is to grow its market in the country. It is therefore recommended that the firm should focus on the youth market segment with an aim of positioning Starbucks coffee stores as a lifestyle and not just a brand and retailer of premium coffees and coffee products. References Cantwell, J, Dunning, J & Lundan, S 2010, An evolutionary approach to understanding international business activity: The co-evolution of MNEs and the institutional environment, Journal of International Business Studies, vol. 41, pp. 567–586. Franchising, 2012, Brewing success in the coffee industry. Accessed online on 3rd Oct from http://www.franchise.net.au/inspire/franchisee/brewing-success-in-the-coffee-industry Grant, J. (2007). Advances and Challenges in Strategic Management. International Journal of Business, 12(1), 2007 Keller, K. Brand report-card. Harvard Business review. Jan-Feb 2000 Lenz, R & Engledow, J 1986, Environmental Analysis: The Applicability of Current Theory. Strategic Management Journal, Vol. 7, No. 4, pp. 329-346 Nichols, C. (2006). Strategy as relationship: the four sided triangle. The Ashridge Journal. Autumn 2006. Patterson, P, Scott, J & Uncles, M. 2010. How the local competition defeated a global brands. The case of Starbucks. Australasian Marketing Journal, vol. 18 no.1, pp. 41-47 Roy, R. & Chau, R. 2011. Consumer-based brand equity and status-seeking motivation for a global versus local brand. Asia Pacific Journal of Marketing and Logistics. Vol 23 no 3, pp. 21-31 Talpau, A. & Bascor, D. (2011). Customer-oriented marketing - a strategy that guarantees success: Starbucks and McDonald’s. Bulletin of the Transilvania University of Braşov, vol. 4 no, 53 no. 1 Thompson AA, Peteraf, M, Gamble, JE & Strickland, AJ 2012, Crafting and executing strategy: the quest for competitive advantage, concepts and cases, 18th edn, McGraw-Hill, New York University of New South Wales 2012. Marketing Lessons: Whatever Happened to Starbucks? Accessed online on 3rd Oct from http://knowledge.asb.unsw.edu.au/article.cfm?articleid=1192 Read More