Starbucks External and Internal Environment - Essay Example

? What Starbucks Really Do Table of Contents Table of Contents 2 Introduction 4 Starbucks: A Brief Overview 4 Task A Analysis of Starbucks External Environment 5 Macro Environment Analysis 5 Political 5 Economic 6 Social 6 Technology 6 Environment 6 Legal 6 Micro Environment Analysis 8 Buyer Power 8 Supplier Power 9 Threat of New Entrants 10 Threat of Substitutes 11 Degree of Rivalry 12 Task A (2) Analysis of Starbucks External Environment 13 Critical Success Factor 13 Task B Analysis of Starbucks Strategic Capability 14 VRIO Framework 19 Task C Strategic Fit Analysis 20 Strategic Fit of Starbucks 21 Reference 23 Introduction The study will try to throw some light on critical success factor of Starbucks. The brand name “Starbucks” has become symbol of quality within last few years. Starbucks has changed the age old concept of coffee store into an exquisite experience. Every day millions of people walk inside the store of Starbucks to experience sublime customer service and quality of coffee. The study will not achieve its objective if it misses the opportunity to analyze resource capability of Starbucks. Resource capability of the company has help Starbuck to influence paradigm shift in coffee industry. Business of Starbucks is complemented by three operating segments such as International division, United States division and Global Consumer Products division. The study has selected UK in order to analyze critical success factor and resource capability of Starbucks. Impact of external environment on business policy of Starbucks will be measured by using PESTLE and Porter’s Five Force analysis. SWOT, value chain analysis and VRIO framework will be used to understand internal strength of Starbucks. Critical success factor (CSF) analysis will be important part of the study. Starbucks: A Brief Overview Starbucks Corporation was established by Jerry Baldwin, Gordon Bowker and Zev Siegl in the year 1971. In the initial years Starbucks operated business with single store located in Pike Place Market of Seattle (Starbucks, 2012). The company is headquartered at Seattle, Washington, U.S. Distribution network of the company is complemented by 6700 owned stores and 4080 licensed stores in USA. Starbucks has established their presence in more than sixty countries with the help of 20,000 stores. The company offers hot drinks, food items, various coffee drinks and other retail merchandise. As of 2011, market capitalization of the company is US$37.84 billion while sales revenue was more than US$ 13 billion (Yahoo Finance, 2012). The company is facing competitions from various big players such as Dunkin' Brands, Nestle, McDonalds, and Wendy's International, Inc. Strategic Group map for Coffee industry can be explained in the following manner: (Source: Brown, 2011) Task A (1) Analysis of Starbucks External Environment Macro Environment Analysis PESTLE will be used to analyze macro environment condition of UK. Political UK is one of the most influential countries in the world and plays crucial role on deciding business policy in North Atlantic Treaty Organization. Government in the country has taken stern steps such as 24% budget cut for department of media, sports and culture in order to reduce overall financial deficit in the country. Government in the country has planned to reduce corporate tax by 22% within next two years and raise income tax bar ?8,200 to ?9,205. Economic Economic recession has contracted GDP growth by 0.2% while industry growth rate of the country has slumped to 0.8% last year. Economists forecasted unemployment of UK will touch 8.4% by the end of 2012 and more than 2.5 million people will get unemployed within next one year Social Budget deficit of Government has created challenge for people of the country to maintain standard living style while "managed migration" police government has further deteriorated the situation. Working age population in the country is growing at a rate of 7.7% for last two years. Technology Retailers are using latest technologies such as RFID, ERP and electronic data exchange to facilitate business operation. Science and Innovation Investment Framework of the country have stated that growth of technological investment in business will touch a mark of 2.5% within next two years. Environment The country has set a target to reduce green house gas emission by almost 8% to achieve guideline set by Kyoto Protocol. Government has directed foreign companies to reduce carbon emission by 22% within next three year in order to achieve target mentioned by Kyoto Protocol. Legal In 2012, Journal’s Index of Economic Freedom has ranked UK as 7th most free economy in the world The country rigorously follows European Union directed labour law and criminal proceedings to maintain its legal system. GDP growth of United Kingdom can be explained by following diagram. (Source: Marketline, 2012a) Factors Opportunity Threat Political Low corporate tax rate Financial budget cut by government Economic Flexible FDI policy of government Slow GDP growth rate Social Consumer demand for hot drinks Unequal distribution of income Technological Implementing RFID in order to decrease value chain cost Low capital deployment in technology integration Environment Ideal weather for nourishing coffee beans Stringent environment norm of government Legal Working under guideline of EU Strict labour law Micro Environment Analysis Coffee industry is growing at a sustainable pace for last few decades due world wide acceptance of coffee products. The study will analyze coffee industry of United Kingdom in order to get a deep insight about market potential for Starbucks Corporation. Brief overview of hot drinks market of United Kingdom can be explained in the following manner. Market Value Market Value Forecast Market Volume Market Volume Forecast Category Segmentation Market Share $2,500.6 million (4.9% growth rate) $3,216 million within next five years 142.9 million kg (0.5% growth rate) 148.5 million kg within next five years UK accounts 7.9% of European market value Tata Global Beverages Limited is the market leader with 15.1% market share and Starbucks has 13% market share (Marketline, 2012b) Porter five force frameworks will be used to analyze market potential for Starbucks in UK. Buyer Power In UK, distribution channels for coffee market are complemented by hypermarket and supermarkets (covering 79.7% of market volume). British customers prefer tea more than coffee products hence companies selling coffee faces challenging situation to alter taste bud of local customers. The coffee industry is associated with low switching cost and product differentiation which increases buyer power up to certain extent. Homemade coffee shops and motorways stations act as alternate retail channel for hot drinks market in the industry. Overall, buyer power can referred as moderate in UK hot drinks market. (Source: Marketline, 2012b) Supplier Power Major suppliers companies selling hot drinks are farmers harvesting coffee beans and cocoa seeds. Suppliers are largely located in various countries such as Africa, Latin America and South Asia. Various factors such as poor economic condition of suppliers, presence of large number of independent farmers and undifferentiated nature of coffee beans decreases bargaining power of suppliers up to a significant extent. Meanwhile multilevel supply chain of large coffee retailers is complemented with inclusion of middle men decreases earning potential of individual farmer. Overall, supplier power in UK hot drinks market is estimated as low-medium. (Source: Marketline, 2012b) Threat of New Entrants New entrants in UK hot drinks market try to distinguish their offering by emphasizing taste, health benefits and quality of coffee bean. Low switching cost for customer enhances market opportunity for new players. Brand equity of companies like Starbucks can create significant competition barrier for new entrants. Leading players in the market use economies of scale in order to create paradigm shift in market equilibrium and achieve competitive advantage over new entrants. Established brands such as Starbucks offer a wide range of coffee product portfolio to customers which further decrease product differentiation scope for new entrants. Overall it can be inferred that threat of new entrant is moderate in the country. (Source: Marketline, 2012b) Threat of Substitutes Tea and coffee are the most popular hot drink products in the country. Coffee plays crucial role on creating cultural heritage of UK, decreasing threat of substitute products. Although consumers prefer to take functional drinks over traditional hot drinks in order to prevent caffeine intake but their number is too small to perturb market equilibrium. Hence overall threat of substitute is assessed as very weak. (Source: Marketline, 2012b) Degree of Rivalry Hot drinks market in the country is fragmented because due to presence of any clear market leader. The degree of rivalry is complemented with low switching costs, limited scope of product differentiation and high start up cost. High exit costs can be classified as important factor for increasing market fragmentation. Existence premium coffee brands like Lavazza and Senseo increases dynamics of business competition in the market. Overall, competitive rivalry for UK hot drinks market is assessed as high-medium. (Source: Marketline, 2012b) Factors Opportunity Threat Buyer Power High preference for Coffee Low switching cost Supplier Power Availability of suppliers Quality of supply New Entrant Low threat Local players Substitute Very weak threat Tea can replace demand for coffee Rivalry Low product differentiation capability of rivals International players Task A (2) Analysis of Starbucks External Environment Critical Success Factor Critical success factors (CSF) are those factors affecting ability of industry players to survive and compete with other players in the market. CSF of Starbucks is complemented by various factors such as competitive capability, product differentiation capability, research and development and marketing capability. Starbucks need to bank on above mentioned success factors in order to mitigate risk factors associated with coffee retailing industry (Gamble and Thompson, 2011). CSF of hot drinks industry is associated four common critical success factors (CSF) and those factors can be explained in the following manner. Factors Application Link with Opportunity/Threat of PESTLE and Porter Five Force Technology CSF Starbucks needs to use internet and mobile advertising to lure UK customers. This can be directly linked opportunity in terms of financial power of Starbucks. Starbucks has the financial capability to execute integrated marketing communication to increase brand visibility among British customers. Service CSF Starbucks needs to provide superior (in terms of aroma, size of coffee bean) coffee products and service (in terms of shorter lead time and responsiveness) to customers. Starbucks has trained human resource capital to provide efficient product and service to customers. Low switching cost of the industry has increased choice of selecting other brands for customers hence Starbucks need to maintain product quality in order to retain customers. Distribution CSF Starbucks needs to create strong online and offline retail sales channel in order to push the brand. Flexible FDI policy of UK government gives the opportunity to Starbucks to expand distribution channel in UK. Starbucks has the financial power to expand retail channels in order to decrease threat from local retailers. Marketing CSF Starbucks need to develop coffee products in accordance to taste bud of British customers. They need product diversification. Low capital deployment in research and development is the industry trend in UK hence it can create problem for Starbucks for future product diversification. Starbucks need to deploy technological resources to decrease product penetration threat of international players. (Source: Brown, 2011) Task B Analysis of Starbucks Strategic Capability Leadership plays crucial role one deciding the strategic capability of any company. Many research scholars have argued that leadership of the company failed to right equilibrium in the strategy in order to retain market competitiveness prior to 2008 (Williams, 2007). Analysis of firm’s resources helps to segregate comparatively important capabilities and resources of particular organization. External analysis shows that Starbucks uses resource based strategy to deliver products in a manner which can’t be matched easily by competitors. Five elements such as tangible resources, capabilities and intangible resources plays cordial role on deciding business dynamics of Starbucks. Resources and capabilities of Starbucks can be explained in the following manner. Tangible Resources Intangible Resources Capabilities Tangible resources are classified as tangible goods helping the company to operate business. Tangible resources are complemented by various items such as property, raw material supplies, logistic capability, products, engineering equipments, electricity and interne (Peng, 2010, pp. 97-105). Starbucks has physical assets such as retail stores and warehouse property, state of art production equipments, coffee roasting machines, brewing machines, transportation equipment and inventory. These tangible assets play crucial role to help Starbucks to achieve business excellence. The company maintains sufficient amount of monetary capital and cash assets to finance various activities like research & development, product diversification, marketing activity and many others (GlobalData, 2010). Intangible resources are classified as intangible assets such as product patent, goodwill, brand equity, intellectual property of particular company (Warren, 2009, pp. 90-101). These assets help the company to earn not only revenue but achieve predetermined business objectives also. Starbucks has created strong brand equity due to their high quality product and services. Starbucks uses its diversified human resource pool to achieve excellence in various fields such as product innovation, manufacturing and retail location selection, marketing activity and retail merchandising to fulfil its business objectives. Starbucks has achieved the skill set to deliver innovative product to customers. Technological capabilities of the company have helped them not only to offer new products but increase financial performance also. Starbucks uses its cash flow and physical assets to fund strategic decisions while good financial performance of the company helps them to get long term loans from various financial institutions. Intellectual and human resource capitals of Starbucks can be considered as other two competitive capabilities for them. Report published by Data monitor shows that the company is improving financial performance continuously for last three years. Starbucks maintains qualified team product engineer, real estate agents and marketers to leverage capabilities. Financial performance (read continuous improvement) of Starbucks can be understood by using financial result of 2011. (Source: Starbucks, 2012) Business capabilities of Starbuck can be understood from their sheer number of company operated stores across the globe. (Source: United States Securities and Exchange Commission, 2011) Value Chain Analysis Primary Activity Inbound Logistics Starbucks earn 85% of revenue from their inbound logistics. Forward and backward integration of supply chain has reduced the cost of total operation (Gates, et al., 2006). Product manager of the company has mentioned that Starbucks is using RFID to decrease total value chain cost. Operation Starbucks has started corporate restructuring program in the year 2008. The company has established extended distribution network complemented by almost 10000 retail outlets. Outbound Logistics Starbucks has established strategic partnership with logistics companies with an intention to support outbound actions such as transportation and warehousing. Starbucks has formed partnership with QuicknSafe for distributing merchandises to external retail outlets. Marketing Starbucks has established brand equity on the basis of people’s lifestyle, needs and values. The company has invested more than $100 million on various advertising activities such as billboard, ambient advertising, POS displays and sales promotion. Retail Sales The company invests more than 1% of its total revenue in retail sales promotion. Separate vending and billing machines are installed inside store in order to ensure smoothness of operation. The company is planning to implement radio frequency identification or RFID technology to enhance penetration of retail sales operation. VRIO Framework Valuable Rare Difficult to Imitate Exploited Inbound Logistics Yes Yes Yes No Operation Yes No No Yes Outbound Logistics Yes No Yes No Marketing Yes No Yes Yes Retail Sales Yes Yes Yes Yes Task C Strategic Fit Analysis Thy study has gathered huge amount of information after doing macro and micro environment analysis for Starbucks. This information can help the study to move further by doing strengths, weaknesses, opportunities and threats or SWOT analysis of Starbucks. Strength Weakness The company has achieved high product diversification which helps them to cater multi dimensionality of customer demand (Special Strength). The company has established strong control over self owned stores in order to decrease cost of operation. Financial highlights of the company shows that net sales revenue is growing at a rate of 8% for last two years. Loyal customer base of the company can be termed as strength for them (Williams and Cutis, 2012). Strategic location of the company has helped them to increase store visibility among customers. Starbucks has established their presence in more than sixty countries while their coffees are widely acceptable. Starbucks has failed to synchronize forward and backward integration of value chain while brand cannibalization is decreasing the penetration of product portfolio of the company (Special weakness). Premium pricing policy of the company has created an entry barrier for them in developing countries. The company doesn’t focus on implementing integrated marketing communication to fillip the brand. Opportunity Threat Strategic partnership with logistic companies of developing countries can decrease the value chain cost for Starbucks in emerging market (read BRIC or Brazil, Russia, India AND China) (Special opportunity). Synchronizing forward and backward integration of value chain will help them to expand business in UK market. They need to adopt competitive pricing policy to fulfil demand of customers belong to developing countries. UK market is getting hypercompetitive day by day due to entry of international players. Long distance value chain might decrease the freshness of coffee beans. The company need to invest capital on achieving product diversification while total cost on R&D has increased by more than 11% in last two years (Special threat). This means Starbucks will incur costs in terms of value chain integration and product diversification in near future. Strategic Fit of Starbucks Opportunity/Threat Fit? Comment Strategic partnership with logistic companies Starbucks has already established partnership with TATA global beverages to enter Indian market while they are increasing backward integration to increase penetration Brazilian market Competitive Pricing Star bucks changes the pricing strategy in accordance to economic situation of particular country hence standard assessment of pricing policy of the company cannot be done. Research & Development Cost Research & development cost has increased more than 11% in last two years which has increased overall value chain cost for Starbucks. Distance Factor in Value Chain This cannot assessed as major threat for Starbucks because long distance value chain integration in Asian countries is creating same threat for other players in the industry. Starbucks has the opportunity to adopt P&G’s front back hybrid matrix model to decrease the threat. Reference Brown, H., 2011. External Environmental Analysis of Starbucks and the Coffee Industry. [pdf] Available at: [Accessed 29 November 2012]. Gamble, J. E. and Thompson, A. A., 2011. Essentials of Strategic Management. New York, Irvin: McGraw-Hill. Gates, et al., 2006. Strategy Analysis. [pdf] Available at: [Accessed 29 November 2012]. GlobalData., 2010. Starbucks Corporation - Financial and Strategic Analysis Review. [online] Available at: [Accessed 29 November 2012]. Marketline., 2012a. Country Analysis Report: United Kingdom, In-depth PESTLE Insights. [online] Available at: [Accessed 27 November 2012]. Marketline., 2012b. United Kingdom - Hot Drinks. [online] Available at: [Accessed 27 November 2012]. Peng, M. W., 2010. Strategic Management: Competitiveness & Globalization: Concepts. Stamford, Connecticut: Cengage Learning. Starbucks., 2012. FY11 Annual Report. [online] Available at: [Accessed 29 November 2012]. Starbucks., 2012. Our Heritage. [online] Available at: [Accessed 27 November 2012]. United States Securities and Exchange Commission., 2011. Starbucks Corporation. [online] Available at: [Accessed 29 November 2012]. Warren, K. C., 2009. Developing Employee Talent to Perform: People Power. New York: Business Expert Press. Williams, J. and Cutis, T., 2012. CIM Coursebook 06/07 Marketing Management in Practice. London: Routledge. Williams, P., 2007. Solving Starbucks Problems: Loss of Store Soul. [online] Available at: [Accessed 29 November 2012]. Yahoo Finance., 2012. Key Statistics. [online] Available at: [Accessed 27 November 2012]. Read More