Starbucks Strategy Analysis and Evaluation - Case Study Example

Starbuck’s Strategy Analysis and Evaluation STARBUCKS’ STRATEGY ANALYSIS AND EVALUATION This paper seeks to perform a strategic analysis and evaluation of Starbucks using Porter’s generic strategies model and Porter’s value chain model. Michael Porter contends that competitive advantage can be acquired through analyzing the value chain of a company. This value chain is a system of interdependent and connected activities through linkages. It is embedded in the larger activity streams of a company where another affects the costs or effectiveness of one activity. A company can gain a competitive advantage by optimizing the coordination of the value chain to create value for services and products, which are more than what it would cost to perform value activities. Thus, a company could create additional value without necessarily having to increase costs or amount of producing these products or services. The customers then pay for the added value. Starbuck’s strategy will also be analyzed and evaluated using Porter’s generic strategy, which involve focus, differentiation, and cost leadership. Cost leadership involves pursuing reduction of costs through a firm control of overheads, sacrificing R&D, and avoiding less profitable and marginal customers. Differentiation involves coming up with a unique product in the market that could be customer service, dealer networks, and brand image. Focus involves targeting a specific group, segment, or geographic market of a product line. Starbucks today would seem to be pursuing differentiation as a generic strategy, although when it started out, its generic strategy was more the strategy of focus emphasizing more on differentiation in a specific segment of the target consumer. In this case, Porter’s generic model will analyze and evaluate the strategies that Starbucks uses in gaining a competitive advantage while Porter’s generic strategies will examine how they utilize these competitive advantages. Analysis and Evaluation of Starbuck’s Using Generic Strategy Model On top of an established strategy based on competence, which is a major contributor to the success enjoyed by Starbuck’s, the company utilizes other strategies so as to maintain a competitive advantage over its main competitors (Thompson & Arsel, 2009: p238). According to Porter, a company has at its disposal three basic strategies that it can use as leverage in its industry. These include focus, differentiation, and cost leadership. Cost leadership is a strategy that aims to produce low cost products that are of high quality while also reducing the firm’s operational costs. However, Starbucks does not utilize this strategy since its products are high cost. A company can also use the strategy of differentiation that entails the creation of services and products that are unique. The firm’s clients then perceive these services or products as unique and an addition of value, which allows the company to charge premium prices on the services and products. Meanwhile, the focus generic strategy involves specific sections or segments of consumers and can be combined with the cost leadership or differentiation strategies (Thompson & Arsel, 2009: p239). Starbucks pursues the focus on generic strategy within their specific target client segment with added emphasis in and the combination of differentiation generic strategy. Starbucks utilizes the generic strategy of focus with a target base of consumers that is composed of educated and wealthy drinkers of coffee that are willing to part with more money for quality customer service and products (Smith, 2011: p505). Starbucks aims at a specific and narrow portion of the coffee industry’s consumers. Therefore, Starbucks’ strategy lays focus on the segment with its services and products being especially designed to meet the wants and needs of this segment of consumer. In terms of integrating the differentiation strategy with that of focus, the firm’s brand is presented with various characteristics that are diverse. Other materials are mixed with their coffee while they also maintain the Arabica beans’ credibility of taste. Starbucks also utilizes Italian words to name their various products, which, while it may be hard fort their clients to pronounce the words, appears to attract more clients. However, the most vital feature that is unique to Starbucks is its reputation and brand image that has been developed via many years of marketing capabilities and image building with a team of staff and managers who have the ability to provide customer service that is first rate (Smith, 2011: p507). Several details cause Starbucks to become special with obvious examples being atmospheric accoutrements, well-planned merchandising, well-focused and soft track lighting, as well as big and comfortable chairs. However, the true differentiators are the details that are related to the manner in which the coffee shop is managed. Therefore, this generic strategy of focus is effectively blended with that of differentiation with Starbucks being able to attain a good mix. Looking at the differentiation generic strategy requirements as laid out by Michael porter, it is possible to shed light on why Starbucks has used this generic strategy for such a long while (Sica, 2009: p20). Companies that lay their emphasis on the differentiation generic strategy can demonstrate strong abilities top market. However, Starbucks only begun to run adverts on the TV in 1998 with their budget allocation to advertising comprising of only 4% of what they incur as total costs. Another characteristic that is common for firms that pursue the differentiation generic strategy is an established and strong capability in basic R&D, with emphasis on subjective measurements of goals, as opposed to quantitative ones. Starbucks conducted R&D through trial and error in the late 80s within the stores owned by the company with no established department for R&D in the firm (Sica, 2009: p21). Another characteristic for a company pursuing the differentiation generic strategy is a long industry tradition of possessing unique products and unique skills. Starbucks had always possessed this reputation in the distribution segment of the coffee industry. Its original store, opened in the year 1971, was well known for its highly knowledgeable staff and high quality standards. However, the company did not start widespread retail distribution within its stores of specialty coffee until the year 1987 when Howard Schultz acquired the company. All characteristics peculiar to the generic strategy of differentiation are suggestive of the fact that the company initially utilized focus as its generic strategy (Ritson, 2010: p150). Following Michael Porter’s characterization of firms that pursue focus as a generic strategy, it would involve combining characteristics of the strategy of differentiation that is directed toward a consumer segment that is specific. In Starbucks’ case, their consumer base’s demographic composition had a narrow orientation. The company had a target client base that was educated and wealthy with preference for quality at a discounted price. These parameters are very specific for customer bases when taking into consideration the general market of coffee. With respect to incorporation of some characteristics of the generic strategy of differentiation, Starbucks possessed a reputation, corporately, for creative flair and quality (Ritson, 2010: p150). While it was not so clear then, it is now established that, in the late 80s, the specialty coffee industry was an attractive one with no firm having a position to defend in this industry. In addition, the strategic approach that Starbucks took to the industry and a framework for an ideal approach of strategy has been identified. Using this information, one can comprehend the reason why Starbucks has had sustained margins of profit while also seeing an exponential increase in market share. Analysis and Evaluation of Starbucks Value Chain Model Acquiring competitive advantage, according to Michael Porter, can be achieved through analyzing the value chain of a company. The value chain of a company can be divided into two activities or categories; primary activities involving physical product creation, delivery systems and marketing, as well as support activities and after sales services; and secondary activities involving company inputs and after sales services that allow the primary activities to occur (Patterson et al, 2010: p45). After the definition of these activities, an analysis of the value chain system can be carried out to aid in strategic goal development and the gaining of a competitive advantage. Starbucks’ value chain system created, in the beginning, additional value on products that its clients were willing to buy. Therefore, the company is ready to charge market prices that are above the industry average for the products. Its clients, in fact, are looking for the quality of coffee and the brand image offered by Starbucks rather than coffee prices (Patterson et al, 2010: p45). According to Michael Porter, all value chain activities possess both information processing and physical components. The physical component has to do with all physical activities, such as groups or individual tasks, product processing, advertising and marketing, supply chain and delivery, as well as after sales service continuation (Gambardella, 2009: p10). The component of information processing encompasses various steps that are needed to capture, channel, and manipulate the necessary data for performance of the activities. In the value chain system at Starbucks, primary activities are inclusive of coffee beans as raw materials, buying from suppliers, storage of coffee beans so as to keep them fresh, and inventory systems that are needed to maintain stocks and for distribution to outlets as the freshness of coffee beans are maintained (Gambardella, 2009: p11). It is also comprised of management of coffee houses, promotional and marketing activities, customer relations, and sales and delivery. These primary activities in the chain of value involve the creation of products, marketing, sales, distribution of products to clients, ensuring a relationship with continuity for consumers. These are via service activities like equipment installation in coffee houses, upgrading and repair of equipment, as well as management of inventory so as to safeguard an incessant supply of coffee beans (Duffy, 2010: p284). All these are inclusive of physical activities necessary for performance in selling and creation of coffee to its consumers and the enhancement of brand reputation and image. Secondary activities are inclusive of the infrastructure that the firm has, in place, to support the primary activities. These include functions of corporate management, legal work, and accounting. Secondary activities are also inclusive of human resources management, employee salary and other emolument determination, and technological developments such as R&D activities, automated processing systems, and design (Duffy, 2010: p285). The secondary activities needed for the support of the primary activities, as well as provision of services and inputs in the manufacture of products. For Starbucks to maintain or achieve their competitive advantage, as well as add value to the brand or products, they must link the various activities and optimize, on their activities, to add value (Crowe, 2011: p25). These activities need to be coordinated so that the linkages between the various activities are properly managed. These linkages, if Starbucks manages them carefully, are powerful competitive advantage sources since it allows for trade offs across organizational processes and lines for Starbucks. If Starbucks can resolve the trade offs due to good coordination of organizational inter-activities, they can achieve an advantage over their competition as it moves out of Starbucks in the form of excellent systems for procurement procedures, or creation of high-price coffee with better quality than that of its competitors. Thus, the brand or product of the company is perceived, by clients, to be of a standard and quality higher than competitors are, which creates added value. Starbucks can then maximize on pricing strategy for the brand or product (Crowe, 2011: p26). In Starbucks case, the activities of value were very effective at first since the coordination between the primary activities and secondary activities was managed carefully, which resulted in added value to its products and brand (Bhandar, 2009: p20). Its operations, outbound and inbound logistical activities, service activities, and marketing are supported via good human resource management, corporate management, procurement activities, and technological development. For instance, stores and their set up must be well planned. All locations are also studied carefully with considerations of minute and details that may see irrelevant, for example, an area’s demographic characteristics, density of people, and traffic flow, as well as careful personnel deployment to these outlets. These are done in support of primary activities whose aim is the delivery of coffee beans of god quality to the consumer. In the component of primary activities, Starbucks’ suppliers require to be selected cautiously with careful planning of coffee beans distribution to their outlets to maintain their freshness (Bhandar, 2009: p21). In addition, their stores are also designed with the aim of exuding an ambience of comfort, as well as a luxury, to their consumers. This acted to create what was referred to as the “Starbucks’ miracle”, which made Starbucks a leader in specialty coffee for more than two decades. However, Starbucks, at present, has begun to experience a downtrend in various areas. The company, in 2008, saw a decrease of more than fifty percent in operating income from the year before. In revenue terms, Starbucks registered a meager increase of ten percent from the year before as compared to a twenty two percent average for the financial years from 2003-2007 (Su et al, 2006: p180). The decline here translates to a significant reduction in recognition of the brand or company. This can also be attributed to the current value chain activities used by Starbucks. As emphasized by Michael Porter, to attain strategic competitiveness, a company needs to optimize activities of the value chain. Gaps in Starbucks’ value chain activities have emerged in the preceding few years. In the end, the link between the components of information processing and physical activities were not maintained and improved. Starbucks’ operations have stagnated, and more complexity, longer lines, and not-so-stellar looking assets could be the cause of modest decreases in their sales as far as the consumer environment is concerned (Su et al, 2006: p180). Because of this, the strategic competitiveness at Starbucks is disintegrating slowly with its rivals making in-roads into their client base. Conclusion The paper has identified that Starbucks has implemented focus as a generic strategy with integration of differentiation. However, this generic strategy may require to be adjusted after being revisited. The company may need to begin better communication with its client base through adverts and promotions. They also require increasing of their client base and expanding, into new markets, to avoid market saturation in their current segment. The company’s marketing objective needs to be engrossed on the establishment of new markets, as well as new product lines if necessary so as to accommodate new clients. Starbucks could create new products that appeal to lower market segments, which they have not fully tapped yet, despite being a potentially lucrative market segment. Thus, pricing strategy could accordingly vary as new products are created with the aim of generating new clients in the market lower end. As far as the Starbuck’s management of its value chain, they have failed to attend to strategic marketing. Lack of coordination has resulted value diminution of the brand or product. Starbucks’ management has failed to come up with a marketing strategy, which has led to revenue drops in the past few years. The company has no visible strategic management, which is evidenced by marketing receiving minimal budgeting, affecting their brand image and recognition. Because of this, their strategic leadership, as well as competitiveness, is now under threat from competitors such as McDonalds and Dunkin Donuts. Through strategic marketing, Starbucks can add value to their brand and products by setting a direction for their relationship with their clients. References Bhandar, M., 2009. Knowledge Management at Starbucks: What Next? U21Global Authentic Assessment Series, 15-26. Crowe, R., 2011. Avoiding the Caffine Crash: A Strategic Analysis and Recommendations for Starbucks. Fall 2009/Spring 2010 Honors Capstones, 22-34. Duffy, D., 2010. The evolution of customer loyalty strategy. Journal of Consumer Marketing, 284-286. Gambardella, P., 2009. Application of Strategy Dynamics: Starbucks. Journal of Consumer Research, 1-27. Patterson, P., Scott, J., & Uncles, M., 2010. 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