Longitudinal Strategic Development Study - Essay Example

 Longitudinal Strategic Development Study 1. Introduction Starbucks Corporation (or “Starbucks”), of the restaurant industry, is a global roaster and retailer of specialty coffee in the world, with operations in more than 50 countries.1 This paper seeks to have a longitudinal strategic development study of Starbucks Corporation by analyzing the strategic positions and choices made by the company in the recent past, what it presently does in its strategies and to help the company to determine its future strategic directions. 2.1 The Recent Past This part would discuss the strategies deployed in the past, years prior to 2008, and resulting outcomes. By dwelling or its recent strategic development history, this paper will have a better understanding of its present position and available strategic choices. This would include looking at the past 5 to 25 years by focusing on those years which have strategic link on the recent strategic development of Starbucks. The past twenty five years may be described as growing years. From its creation in 1971 up 2006 before the big fall of its share price, the company was observed adopting growing and expansion strategies as a logical explanation of its continued stock price. See Appendix A. The dramatic ascension of Starbucks from a single coffee store in Seattle’s Pike Place market to a Fortune 500 company in 2009 could now be considered an American business legend that would show a different kind of entrepreneurial skill from the founders and managers.2 A critical development that contributed to its expansion strategies involved the hiring of Howard Schultz as Director of Retail Operations and Marketing. Mr. Schultz who operated a coffee bar chain eventually bought the company from the original owners led by Baldwin.3 After rebranding his coffee chain into Starbucks, he eventually became the Chairman and CEO of the company and continues to occupy the position even at present.4 Mr. Schultz was then living in New York as he managed the U.S. operations of a Swedish kitchenware company. It was his being fascinated about an ordering large quantities of an unusual kind of coffee filter by a small Seattle company, Starbucks coffee, that caused the man to visit the store in 1981. Starbucks owners-mangers named Gerald Baldwin and Gordon Bowker, who had been running the company for a decade had hired Schultz who was earlier fascinated by “the vision of a national chain of coffee stores”.5 Despite their reservations of the owners-managers, the hiring of Mr. Schultz head of marketing, could be considered as major part in bringing a milestone in the growth and expansion of the company From Mr. Schultz, the story of Starbucks can be described as growth oriented with the generic strategy of differentiation.6 As part of a specialty industry under the restaurant industry differentiation was a necessary for the company not only to survive but even to grow up to the point where it now has global operations when it started only in the US from the past. The strategy of growth matched with differentiation as generic strategy worked for company for about 20 years.7 A continuous expansion in its revenues accompanied by rising profits and a soaring stock price is evident can be gleaned from the case facts. Since strategy is not just a function of how good company with what is has internally, the external environment has as well come into the picture to cause the Starbucks’ share price to suffer a downturn that was unexpected and rapid. Stock-market valuation of the company in 2006 indicated of the problems to come for the company. This has become evident after its stock price reached peak of $40 in October 2006 which exhibited a decline by more than 75% over the next two years. See Appendix A.8 As stock price behavior was just a reflection of its operations, it was natural to experience during 2007 a slowing in sales growth and operating profits. A year after joining Starbucks, Mr Shultz’s vision had shown a radical change. He saw more than a coffees chain after having a business from to Milan, Italy. It was from the experience that he saw the opportunity for the Starbucks to be place where people meet and share experiences of drinking great coffee.9 Having failed to get the support of the owner-managers, this caused him to open his own coffee bar, II Giornale, in 1986. In about 12 months thereafter, Mr Shultz had bought the company and not less than six stores and merged the same with his own coffee bar. Having gone public in 1992 with Mr Schultz as the owner of majority shares, there were more than a hundred fifty Starbucks outlets. The raising of $27 million from the stock offering made faster the company's expansion.10 Starbucks also grow inorganically from its selected acquisitions including the Seattle Coffee Company in 1998, Seattle’s’ Best Coffee in 2003 and another one in 2006.11 Restructuring was therefore the response made to decline of its stock price in 2006. From the fall in 2006, Schultz implemented a turnaround strategy that may be called “restructuring” in 2008, when he returned as CEO of the company. Said strategy covered a sharp reduction in prearranged new store openings in the US. It also included adopting new operational and human resources practices to improve customer service. It was during summer of 2008, that Schultz announced the shutting down of more than 500 U.S. stores and withdrawal from Australia in support of his plan to “reigniting the connection with customers,” and “reallocating resources from the U.S. to overseas”. Despite the adoption of the strategy of restructuring, Starbucks’ financial results for the year ending September 2008 was not spared by the economic downturn that has become notorious after the collapse of big companies in the US. The crisis could not simply give an exemption to revenue and profitability of Starbucks in 2008. “Badly hurt” was the phrase to describe Starbucks’ performance, when its net income was down by not less than 60% plus the first ever decline in its quarterly revenues after having continuously shown an increase for not less than 20 years. Normal reactions followed from the stock market, with the fall of its stock price by 33 cents. Asserting resiliency, the company did not took the challenge sitting down when Mr. Schultz announced the company’s well-developed plan by strengthening their business through more efficient operations which was coupled with preservation of the company’s fundamental strengths and values of its brand. Long-term shareholder value combined with innovation was also declared as goals by Mr. Schultz. 3.1 Current Strategic Situation This part will evaluate and appraise the company’s current strategic situation at the time of this writing in relation to what has been discussed in the previous section about the company past strategic choices and outcomes using appropriate sources to support analysis. This would therefore play particular attention to the company’s strategic macro, industry and competitive environment, changes and trends in the environment. This would further include looking into what the company has in terms of its internal and external resources, capabilities and organizational structure that could be coming from the decisions made in the past. This would give therefore a synopsis of its strategic situation from strategic choices to be meaningful for its future as would be discussed in the next section. To accomplish this part, this part uses the Porter’s five-force model12 to determine the company’s industry opportunities and threats (OT). This would also make use of financial analysis and identification of its unique capabilities as bases for the company’s strengths and weakness (SW). Combining the result of the two would give the SWOT13 summary which be used to evaluate the present strategies of Starbucks. This part applies discussion in Chapter using the models therein and how Starbucks can make use of them. In relation to goals and objectives of the company which are assumed to defined, its strategies must be able to make use of its company’s strengths while trying to correct or avoid its weakness. At the same time such strategies must be to take advantage of industry opportunities and protect the company from threats. 3.1.1 Competitive Environmental Analysis This part applies Porter’s Five-Forces Model in relation to PEST to determine the industry opportunities and threats.14 Opportunities are favorable conditions that could increase profitability of the players in the industry while threats are those that could lessen the said profitability for the same players. 3.1.1. Ease of entry from new entrants (high) There is high threat from new entrants in the restaurant as the latter is not capital intensive and thus economies of scale are not a bar to entry. Companies could easily come into the industry, which makes it unfavorable to present industry players because more competition generally means less profitability. Although the industry may be expected to grow, the growth could easily be eaten up by entry of new players thus causing profitability to be shared by existing players including Starbucks. 3.1.1.2 Bargaining power of suppliers (low) Bargaining power of suppliers may be considered low because suppliers of coffee products are essentially believed to be dealing on large volume because of its nature as commodity products. There could be many sellers or potential providers’ coffee but the volume purchase by buyers makes it less favorable to said suppliers.15 This is therefore an opportunity for industry players in players in the restaurant industry 3.1.1.3 Bargaining power of buyers (high) Bargaining power of buyers is believed to be high because there are many restaurant customers who could be having low switching cost as they could have their needs served by other restaurants as there are a good number of industry players. Almost every consumer of Starbucks may have a wide array of choices from market. This is a threat to the industry as it could leave buyers shifting from one player to another or developing their own. 3.1.1.4 Threat from substitute products (high) Threat from substitute is high because the numbers of apparent substitutes may be numerous. The choice of having to drink high-price coffee products becomes a less preferred choice if the economy is not well. As such in the case of Starbucks, the slowdown in the US economy starting 2007 has actually noticeable effects on the profits and stocks performance of the company. 3.1.1.5 Intensity of competition or Rivalry among Existing Firms (high) There is a strong rivalry of among existing firms as evidenced by increasing competition in many parts of the word the case study would reveal. These could cause the restaurant industry players to compete heavily on prices and not on differentiation value on how to satisfy their clients who wanted more flexibility because of decreased purchasing power. This is therefore a threat for players as they compete more on prices. The resulting competition on prices could leave all the industry losers in the final analysis as this phenomenon could increase cost that could drive to reduce their profitability. 3.2 Financial Analysis and Unique company characteristics Financial analysis is constructed by comparing the overall financial situations of Starbucks based on their financial statements in 2007 and 2008 and the industry. 16 See Appendix B. As to profitability Starbucks appears better compared with industry average. While Starbucks had a two-year average of 5% profit margin for 2008 and 2007, the industry had only 4.62%. The difference becomes clearer in terms of return on assets and return on equity, where Starbucks has greater differential advantage in ratios than that of the industry. Thus, the profitability rates of Starbucks are indeed evidence of its strength. Return on equity (ROE) of Starbucks however would also show things about the how less superior the company has performed in 2008 compared to previous year from 29% ROE to 13%, a proof the financial crisis has affected the company. See Appendix B. As to liquidity, which measures the capacity of a company to meet its currently maturing obligations using the current ratio and the quick asset ratio17, Starbucks can be considered still liquid. The quick ratios and current ratios of Starbucks for the years 2008 and 2007 respectively could not be computed to indicate positive liquidity since case facts indicate working capital deficit for both years. This means that current liabilities exceeded its current assets and therefore it has a problem or weakness in liquidity. See Appendix B. As against competitors in the industry, Starbucks may be considered to really have a problem in meeting is obligations on time. This indicates that Starbucks is not liquid or is slower in generating cash from its operations than average competitors and has inferior ability of paying its short-term obligations. As to solvency, Starbucks also showed a less superior position in terms of debt to equity ratio at an average of 1.11, which is more risky than industry at 0.79. The higher debt equity ratio may signal that the company may just be maximizing its capital structure as more debt mean higher profitability.18 This is in fact verifiable as the company was indeed more profitable in terms of higher ROE, ROA and net profit margin. Nevertheless, the higher financial leverage of the company can still be viewed as weakness for strategy purposes. One unique characteristic on the company is having established name that has proved a market capability to survive and grow. 19 3.3. Evaluation of Present Business & Corporate Strategy To evaluate the present strategy, there is need to know whether the company follows some of the principles that may be learned from some models for strategic management by responding to the following questions: How does present strategy fare in relation to strategic management models? In using Porter’s Five-force-model, does it take advantage of industry opportunities, protect itself from industry threats, make uses of its strengths and correct its mistakes under the financial analysis? The present strategy based on decisions made in 2008 can be described as restructuring of its operations by cost reduction and productivity improvement. This can be found evident in the decision to close a number of its stores in the US and in other markets. Evaluation of the company’s strategy could now be done by responding to whether it has protected the company from industry threats of high bargaining power of buyers, high ease of entry for new entrants, high intensity of rivalry of players in the industry and high availability of product substitutes. The answer can be made in the affirmative in the sense the cost reduction by restructuring operations could improve the company’s position to face the threats as aggravated by the continuing effects of the financial crisis. In addition that strategy took advantage of industry opportunity of low bargaining power of suppliers as it meant making new arrangement with suppliers as not to unduly burden the same with overproduction. As to whether it allowed the company to use its strengths and to improve its weaknesses, the answer can also be made in the positive. By reducing cost, the company was effectively improving its liquidity position so that it could meet it currently maturing obligations. Indeed to be profitable was not enough if one cannot survive the threat of bankruptcy for failing to satisfy current creditors for short-term obligations. Failing to pay the salaries of employees as a sign of poor liquidity cannot be left unattended or the employees will sue for bankruptcy as salaries are normally survival kits for many employees. The strategy of cost reduction also made use of unique characteristic of having established a name that has proved a market capability since external crisis in the US did bring down purchasing power of customers. The profitability of the company was made stronger too because of the cost reduction strategy. 4. Future Strategic Direction If the recent past strategic situation may be described as growth years which entailed growth strategies with generic strategy of differentiation, and the present strategy was restructuring to attain cost reduction primarily in response to the pressures of the external environment, which course of action is appropriate for the company for its future direction? This section part would explore the limited range of distinctively different choices available for the company in the future based on the research and analysis made from the previous two sections. This would therefore evaluate and assess the choice available leading to the most appropriate recommendation company for its future. Some assumptions will be used with some explanations in relation to recommendations as a way to accommodate uncertainties and changes that might occur in the said recommendations in the event of occurrences of specified contingencies or changes in assumptions May the company continue to adopt growth strategies as in the past and restrained at present assuming the economy will recover from recession? The answer to this question is or of course a big yes since there is no question that it has the internal capacity given the forces in the external environment that are correctly assessed. To be able to determine the future strategic direction of Starbucks there is need to connect with the evaluation of present strategy in the previous section. It was found that the cost reduction strategy as part of its restructuring operations strategy took advantage of industry opportunity, protected the company from industries, helped the company to correct its weaknesses and made use of its strength of having a good profitability. It would have been difficult to go into cost reduction if there is low profitability. Otherwise stated, there is need also to identify major strategic issues facing the organization in the future. The strategic issues faced by the company could always be reduced simply on asking the question: Should the company remain at its status quo, expand or diversify into other industries? To remain at status quo at cost reduction when the economy is showing recover would be to do nothing and would just have to continue with present growth. This however appears not supported with what the market may allow as recession in the US and other parts of the world no longer shows at least in terms of quarterly gross domestic product growth. Given therefore the changes that would alter the economic environment brought about by the recovery from economic crisis of the world economy what industry opportunities under the Porter’s five forces could be brought about that would create industry opportunities. The nature of the company's business is there are close substitutes to specialty coffee products. As analysed earlier using the Porter's five-force model, there is high threat from the availability of product substitutes. Such was partly triggered by economic condition where the purchasing power of customers decreased. However, assuming the world economy will recover in the near future, the same would mean increasing the purchasing power of consumers in the coffee house industry or restaurant industry. The force in the availability of product substitute could be change depending on the relative price performance of substitutes, switching cost and buyer propensity to substitute.20 In other words, despite the presence of product substitutes in the industry, the companies are not left without options to influence the forces in the said industry as to power coming from the availability of substitutes. Since Starbucks has built on its brands during boom times, it can capitalize on the same strength when the economy recovers to influence the price performance of its products in relation to competition. Its generic strategy of differentiation which was successful in the past can always be used and further fine-tuned in relation to changing taste and preferences of customers. If therefore the company can improve substantially it’s the price-performance of its products by delivering better value and quality to customers, it could turn the previously classified industry threat into an opportunity that could be taken advantage with assumption that customers will have increased purchasing power as the economy recovers. To allow the company to improve the price-performance of its product it would have to use the power of its branding strategy that would entail continued research and development activities to continuously watch the changing taste and preferences of customers and determine the level where customers would rather buy the company’s products rather than from competitors. Investment on research and development (R & D) activities to strengthen differentiation as a way of building switching costs would a required part of its strategy. By so doing this, the company would be in effect also protecting itself also from industry threat of high bargaining power of buyers. Focusing on R&D may allow the company to make its product exclusive and different. This strategy would neutralize the high bargaining power of buyers or at least the latter would be warned of the high risks of spending resources that will not produce the expected rewards for more satisfaction from their money if they buy competing products from that of Starbucks The same strategy could also protect the company from industry threat of strong on rivalry among existing players in the industry. Be investing on R & D, Starbucks could strengthen its branding strategy and at the same further innovate for other products needed by the market to create a sustainable competitive advantage over competitors. It will also make use of its strength of high profitability and improved liquidity as a result of restructuring strategy currently. Using such strengths maximizes the use of its resources instead on earning risk-free rates from banks. The greater profitability and liquidity that will be produced as result will build on its declared objective of building long-term shareholder value. There is no successful branding strategy that is not supported by good research and development. As prerequisite, the company virtually fulfills its long-term view since it takes courage and risk to invest in such research and development but the returns would be in the form of competitive advantages21 that would allow the company to outdo competitors and even perhaps to weather temporary dislocations in the economy as it has done in 2008. Appendices Appendix A Figure 2.1 of the Case Study22 Appendix B – Summary of Financial Information23 Works Cited “Annual Report of 2010”. 2011. Starbucks, 2 November 2011 Brigham, E. and Houston, J. Fundamentals of Financial Management, London: Thomson South-Western, 2002 Case Study -- Case 2- Starbucks in 2009: The Coffee Goes Cold “Company Profile”. (2011). Reuters. 2 November 2011< http://www.reuters.com/finance/stocks/companyProfile?symbol=SBUX.O > Industry Ratios”. Reuters. 2 November 2011. < http://www.reuters.com/finance/stocks/financialHighlights?symbol=SBUX.O > Pearce, J. and Robinson, Jr. R. Strategic Management. Ninth Edition. New York: McGraw-Hill, 2004 Porter . Competitive Strategy. London: Free Press, 1980 Porter. Competitive Advantage. London: Free Press, 1985 Read More