Trouble Brews at Starbucks - Case Study Example

Trouble Brews at Starbucks Starbuck Company began in 1971 and was based at Seattle in Washington. It had specialized in the selling of whole bean coffee. In 1982, it had expanded into five stores that sold coffee beans, wholesale businesses that targeted local restraints and roasting facility (Starbucks Corporation n.pag.). In early 80s it was managed by Howard Schultz who came with a new idea from the Italy cafes (Buchanan and Simmons 67). He ended up purchasing it from the original owners for a sum of four million dollars with the aim of expanding his idea. The use of auto service and music label fueled the company growth. However, in 2007, trouble began when the company performance began to decline. It reported a reduction in the number of customer visits in the United States leading to a 50 percent drop in share price (Pride, Hughes and Kapoor 45). In two quarters growth remained flat and declined in the fourth quarter. This led to rehiring of Howard Schultz, who was viewed as a visionary leader. This was done on the purpose of restoring Starbuck’s premier brand. To this end, this paper analyzes this company to understand how it can regain its earlier status. Situation Analysis Porter’s 5 forces Competitors’ rivalry In the industry, the level of competition is very high. Some of the major competitors for this company include the Tully’s coffee, Caribou Coffee and Gloria Jean’s. Although, there are a high number of competitors, the industry is dominated by the mentioned competitors. Threats of new entrants In Starbucks case, there are new entries and other firms in the market. The company’s new competitor is McDonalds’ “McCafe”. Competitors are likely to enter this industry because the startup cost is low. McDonald has the ability to create its distinct product that will help it tap in the coffee market. A store that can successfully enter the market has the potential to make profits. Fortunately, the company’s location limits new entrants. Also, the existence of differentiated brands enables the company to increase the switching costs for customers. Consumers bargaining power For Starbuck, the sheer scale has helped reduce the buyers bargaining power (Romney n.pag.). There is no single group that influences the purchase of the company’s products in large quantities. Also, there are different options as a result of a high number of competitors. In addition, the products that can substitute coffee are in of a variety. Substitutes’ threats This threat is high for the company. The purchase of bottled coffee is seen as inexpensive rather than opting for the company’s mug coffee. There are also products that can be used instead of coffee. They include tea, juices and soft drinks. However, the threat from these substitutes is challenged because none can provide a similar experience related to that of regular coffee. Supplier Power The suppliers have low powers in this industry. This is because buyers of coffee commodity are free to purchase it from any supplier. However, in the case of Starbuck, the suppliers seem to have some power. This company uses coffee of high quality that can only grow in a given area like Brazil. Also, the company maintains that its suppliers should follow certain standards and observe corporate social responsibility. It also encourages diversity in its suppliers by recognizing women and the minority. This makes it lose opportunities as it bargains. Environmental Scanning Political The issue of globalization has made it hard to survive by relying on domestic market alone. Local and state controls also shape the performance of Starbuck Economic The increasing level of income to spend on luxurious life is beneficial to Starbuck. The existence of two income consumers has increased spending. However, the global financial crisis also compels consumer to go for cheaper products. Social Coffee consumers are likely to change their preferences to other beverages. The desire to have free-chemical products also shapes the buying behaviors. Technological Investment in advertisement technology can benefit the company in extending to other markets and restoring to its prior premier. Also, online purchasing will help reduce hassle among customers. Environmental Starbuck promotes environmental protection by encouraging its suppliers to observe its standards. Legal The company is affected by the state and local government control. SWOT Analysis Strengths The company has never experienced workers strike or stoppage in its operations. This has helped it maintain a good reputation among its workforce. The company has established good relationship with its suppliers and thus helping it balance their bargaining power (Simon 76). Its locations are built in high traffic areas and thus exposing it to a high number of customers. The company’s employee rate of turnover is at sixty percent when compared to that in the fast food business that stands at 140 percent (Starbucks Corporation n.pag.). The company only moves to a new market after it has dominated the one it has entered. Weaknesses Excessive focus is put in a given market before expanding to another one. The company expansion was so quick and it has already saturated the market in the United States. There is prohibition of smoking in its stores and thus eliminating some of its customers. Opportunities Chances to expand into Latin American and European markets. Development of distributions agreements to other business like hotels, airlines and suppliers of coffee to offices. Utilization of supermarkets to expand into international markets. Creation of numerous brands for extension. Threats The coffee market in the United States has been saturated. Their price for coffee beans is likely to increase in the coming future. Farmers are also likely to change from growing of coffee to other crops There is competition from Japan Consumers need for healthier lifestyles. Recommendations 1. Starbuck’s should expand to European and other markets in America. Currently, the company has dominated the United States market and thus places for expansion are minimal. Expanding to new markets outside the United States will give the opportunity to survive and overcome negative forces in the domestic market. 2. The company should create facilities that will accommodate smoking customers in its stores. The company prohibits such customers and thus eliminating them. There should be creation of a smoking zone to accommodate these customers. In the United States the number of people smoking is high and, therefore considering them will win back new customers. 3. The company should consider purchasing lands for growing its own coffee to counter the threat of farmers abandoning coffee growing. When this happens, the company can rely on its coffee and also reduce the power of suppliers. The purchase of this land should be in areas that produce high quality coffee like Brazil. 4. There is need to develop distribution agreements with different partners like airline industries, supermarkets, and other workplaces. This will help the company reach new customers owned by other industries or business. Currently, the company has little distribution relationships. They should be strengthened by agreements. 5. There is need to reduce standards expected from suppliers so as to reduce their bargaining power. Currently, the company has increased the suppliers’ powers by providing what they expect from them. For instance, the suppliers should come from a particular region that provides quality coffee. Also, diversity is expected in suppliers. They should be comprised of women and even people from minority groups. Such standards deny the company the ability to enjoy opportunities among the suppliers. 6. The company should aim at producing products that do not threaten individual health. Currently, the company aims at purchasing its coffee from high quality areas. There is also need to ensure that the coffee meets different health expectations. This should be strengthened through advertisements and understanding the needs of consumers and working on their specifications. 7. Finally, there is need to reduce the focus given on a new market. The company has the tendency of focusing on a market excessively with the aim of dominating it. This denies it the opportunity to identify other markets and venture into them before other competitors take advantage of them Potential outcomes When the above recommendations are considered, the company will have several outcomes. First, expanding to new markets will enable it survive in the current world where globalization has made it hard to depend only on domestic markets. Second, creating smoking zones facilities will increase the number of customers who smoke and thus increase the revenue generated from these new customers. Third, investing in the growth of its own coffee will relieve the company from the burden of relying on farmers who can change their habit of growing coffee anytime that they deem that it is unprofitable. Fourth, signing distribution agreements will enable the company have loyal customers and also meet new consumers that are easy to reach when a partner is used. Also, being health conscious will help the company maintain a good relationship with the community and thus create a good image. Finally, reducing excessive focus on one market creates an opportunity to secure capital for other new markets. Works Cited Buchanan, Lauranne and Simmons, Carolyn J. Trouble Brews at Starbucks. London: Ivey Publishing, 2009. Print. Pride, William, Hughes, Robert and Kapoor, Jack. Foundations of Business (4th ed.). Mason, OH: Cengage Learning, 2014. Print. Romney, Lee. “Trouble Brews for S.F. Starbucks.” Common Dreams, 2011. Web. 14 Apr 2014. http://www.commondreams.org/headlines03/0806-04.htm Simon, Bryant. Everything but the Coffee: Learning about America from Starbucks. California: University of California Press, 2009. Print. Starbucks Corporation. “About Us.” Starbucks Corporation, 2014. Web. 14 Apr 2014. http://www.starbucks.com/about-us Read More