Business Strategy: the Starbucks Coffee Company - Essay Example

THE STARBUCKS COFFEE COMPANY Introduction Starbucks is a leading coffee retailer and sandwich industry leader operating of the global scale. In the UK, Starbucks obtains a competitive and leadership position competing with such companies as McDonald’s and Dunkin’ Donuts, Costa Coffee and Caffè Nero. Starbucks was opened in 1971 in Seattle, Washington. The company entered the UK market in 1998. When Starbucks was conceived, coffee manufacturers were focusing on the rational benefits of their brands such as the superior taste attributable to a particular growing process as a way of competing in a declining market. Leadership Position in the UK Market In the UK, Starbucks obtains a leadership position in the coffee and sandwich industry in the UK creating a unique value propositions and unique brand image. “According to the retail analyst Euromonitor, the company has a 16.7 per cent market share, one per cent ahead of Costa Coffee” (Hickman 2008). In spite of recent decline, the Starbuck’s managing director in the UK admits: ““We have seen steady consumer-led growth in the UK market and we remain excited by the opportunities presented by [it],” Mr Broad said. “International markets as a whole continue to be a growth engine for the company.” (Walsh 2008). For Starbucks, brand positioning serves to make competitors attractive brands seem deficient. This goal is achieved by introducing a new benefit to the category. Starbucks positioning of coffee as a destination rather than a product made other coffees seem ordinary and unexciting. Alternatively, introducing a comprehensive position might make less complete offerings seem deficient (Baye 2002). Starbucks, Tte biggest player in Britains £900m-a-year coffee shop industry offers blander drinks than its competitors Costa Coffee and Caffè Nero and is costlier than most rivals, testers for the consumer group” (Hickman 2008). In the UK, Starbucks has built a powerful experiential brand. Starbucks stores are much more than a place to purchase a jolt of java. They offer a brief reprieve in a hectic day; a chance to inhale the rich aroma of fresh coffee and listen to relaxing music, while tasting a rich, specially prepared brew in the company of like-minded coffee addicts. One hallmark of the Starbucks experience, and any great experience really, is consistency. “Starbucks remains the more recognized chain with 27% of the respondents rating it their favorite, with Costa at 15%” (UK coffee market 2007). External Analysis - PESTEL Today, political situation is stable marked by democratic processes and liberalization reforms. Strong political traditions have a great impact on the UK market. Political interference and corruption are the main risks for a foreign company (Crawford 2003). Starbucks created a coffee-based experience in which the range of preparations and atmosphere of the stores encouraged customers to view having a cup of Starbucks as a way of indulging themselves. In essence, Starbucks targeted people seeking an indulgence experience rather than simply coffee consumption. While a main focus in competition-based positioning is to situate the firms brand, in so doing an effort is often made to affect the performance of other category members (Crawford 2003). Legal Factors Legal Environment: the UK introduces laws and regulations in order to support foreign subsidies and attract FDI (foreign direct investments). In order to support national economy, the governmental prevents price rises, or even to rolls them back in basic industries such as steel. Governmental involvement seems to relate price increases to the impact on inflation and increased productivity. Government has the influence to block or roll back price increases (Hollensen 2007). The government can set parameters for how pricing is done. The law of the UK in this regard is particularly well-developed and has served as a model (both positively and negatively) for other parts of the world, including the European Union and Japan. Indeed, antitrust law in the UK has evolved substantially over its more than 100year history to account for marketplace changes. Setting prices to reduce or avoid market risks is instinctively rational behavior that generally has been discouraged by the law, although there has been a substantial softening of public policy in this regard. There are two types of price fixing—horizontal and vertical. The former is where competitors agree on the prices they will charge or key terms affecting price. The latter is where suppliers and resellers agree on the prices the resellers will charge or such terms, but only applies where ownership to the products changes hands. In other words, vertical price fixing does not cover consignment sales and those through agents or independent sales representatives. In general, legal and political situation in the UK supports market growth strategies and further expansion of Starbuck (Starbucks Home Page 2008). Economic situation Economic situation in the UK is marked by low inflation rates and high income per capita. Thus, liberalization and high level of investments can be considered as opportunities for a company to enter this country. The UK has higher standard of living. For coffee and sandwich company like Starbucks, there are also the necessities of making long-run capital commitments, meeting the requirements of joint ventures with nationals, and the imposition of special income taxes and import duties on necessities, as well as differences in social legislation, location considerations, protection of home products, governmental attitudes and control, laws affecting labels and standards, transportation and communications problems, and the risks of inflation, currency devaluation, and expropriation (Hollensen 2007). All these create many additional uncertainties to those encountered in national marketing. In 2007, GDP per capita was $ 2.772 trillion, and GDP per capita was   $45,845  Social-demographic factors Social-demographic factors suggest fast population growth and decreased mortality rates. Both in physical appearance and in most aspects of their culture-notably, their language, their traditional form of administration, and their religion (Johnson and Scholes 2003). British people have strong preferences for coffee, too; lighter roasts are preferred to darker roasts and drip brewing is common, yielding a weak brew by southern European standards. Despite these preferences, Starbucks is redefining coffee in the UK, using that typically southern European brew—espresso. The technology to brew espresso is well established, but its appeal in North American has been limited. But through the concept of the coffee bar, Starbucks is reeducating British people about coffee and is creating a coffee culture. As a result, many people are abandoning their old concepts of coffee—as a weak, drip-brewed beverage—and replacing it with the Starbucks-crafted concept of the Italian coffee bar. Technological factors Technological factors involve the Internet access and development of telecommunication infrastructure, new methods of doing business and information availability (Innovation the key to a good drop 2007). The application of computer technology and the use of new analytical techniques has added greatly to the efficacy of planning activities. Such tools as critical paths, input-output analysis, payoff matrices, decision trees, linear programming, and simulations (Kotler & Armstrong 2005). Starbucks pays a special attention to its milk products and selection of coffee beans. The milk must be steamed to 160 degrees Fahrenheit. Most Italian espresso machines contain a single boiler that both heats the water for coffee and makes steam to foam the milk. As a result, drawing the steam for milk affects the heat of the remaining water, which can produce an inconsistent espresso. If the water is too hot, the espresso will taste burnt; water that is too cold will not extract all the flavor from the ground coffee. Competitive Environment Threat of New Entrants In the UK industry, threat of new entrants is low because entry barriers are high and competition among companies is strong. The main competitors are McDonald’s,, Costa Coffee and Caffè Nero. In the UK, competitors provide `commodities with little differentiation and customer loyalty is low. In addition, high inventory costs and competence barriers prevent many companies to enter this market. It is important to note that experiential brands also differ in terms of the potency of the experience. While a stop at the local Starbucks cafe may evoke mild, positive feelings, a massage and facial at Elizabeth Arden may lead to more intensely pleasurable feelings. The potency of an experiential brand may be affected by both the intensity with which a single sense is engaged and by the number of senses that are stimulated (Starbucks Home Page 2008). Threat of Substitute Products Threat of substitute products is possible thus the majority of buyers will not easily switch purchasing to the substitute without penalty. According to statistical results: “coffee remains the nation’s third-favorite non-alcoholic beverage consumed by 70% of adults, compared with 83% for tea and 81% for fruit juice” (UK coffee market 2007). In the UK, coffee beverages and sandwiches can be produced through a different technology and enter the market. Thus, for Starbucks, they are a unique products which can be substitutes only by cheap products or cheap minerals. Despite these preferences, Starbucks is redefining coffee in North America, using that typically southern European brew—espresso. The technology to brew espresso is well established, but its appeal in North American has been limited. But through the concept of the coffee bar, Starbucks is reeducating North Americans about coffee and is creating a coffee culture. As a result, many people are abandoning their old concepts of coffee—as a weak, drip-brewed beverage—and replacing it with the Starbucks-crafted concept of the Italian coffee bar (Truett and Truett, 2006). Following Walsh: Now the average punter can tell the difference between a Starbucks coffee and a Nero coffee. Their palates have become more sophisticated.” He said that the quality of its coffee was also an issue, although not, as many observers believe, because of the blandness of its flavour compared with the stronger, European-style coffee served by Costa and Nero.” (Walsh 2008). Thus, every Starbucks café latté can have the perfect ingredients: 2 ounces of coffee brewed at 90 degrees Celsius, under 9 bars of pressure, for 18 to 23 seconds, combined with 10 ounces of milk steamed to 160 degrees Fahrenheit. Such standards produce a remarkably consistent product yet uniquely personal experience. By contrast, Americans favor milk in their coffee (Stacey, 1996 Starbucks Home Page, 2008). Bargaining Power of Suppliers Bargaining power of suppliers is high because Starbucks relies heavily on high quality products and on time delivery. Recent years, Starbucks is accused in low quality of its products but the company rejects this information and prove high standards of all products sold on the UK market. “Starbucks defended its reputation saying it offered "the highest quality coffee" as a result of buying the top 2 per cent of arabica beans on the world market” (Hickman 2008). Starbucks suppliers have a unique availability product they can exert a strong influence over prices and conditions of supply, therefore potentially putting pressures on the businesses purchasing their product as the most important, there is a limited number of suppliers in this industry. Starbucks gives a special attention to cocoa products. “Starbucks does not purchase cocoa beans in the same manner as coffee. There are numerous suppliers and manufacturing processes along the supply chain to Starbucks from the countries where the raw cocoa beans are grown” (Starbucks Home Page 2008). Setting prices to reduce or avoid market risks is instinctively rational behavior that generally has been discouraged by the law, although there has been a substantial softening of public policy in this regard (Baye, 2002). Bargaining Power of Buyers Bargaining power of buyers has a great impact on Starbucks products because there are a limited number of buyers who can afford its products. These facts show that competitive forces are strong and the rivalry is based on inventory management and ability of companies to deliver their products in the shortest period of time. In the UK, Starbucks is the second expensive coffee and sandwich retailer after Costa Coffee. “At £8 for the items, Costa Coffee was the most expensive chain, followed by Starbucks (£7.57), Caffè Nero (£7.11) and independent caf鳠(£6.40). A cappuccino in a small caf頷as a third cheaper than one bought in a chain” (Hickman 2008). In retail industry fixed costs are high, and Starbucks products has fewer inventories relative to annual sales than other companies (Chaffy et al 2000). The main problem for Starbucks is that its sandwiches contains “more than the 495 calories in a McDonalds Big Mac.” (Hickman 2008). Many UK customers can switch to other brands in order to consume healthy food and beverages. The simultaneity of production and consumption also drives the aspect of services that they are perishable: the flight that lifts off with empty seats can never retrieve those seats for future use; the professionals time spent on seasonal projects must also manage supply and demand imbalances. Also, “a Starbucks mocha with whole milk had 396 calories, compared with 326 at Caffè Nero and 297 at Costa, while a Starbucks classic blueberry muffin had 591 calories. By contrast, a black coffee without sugar contains almost no calories” (Hickman 2008). The closest approximation services managers have to inventories is queuing, but this solution is not often desirable to customers (Fill, 1999). in order to keep its UK customers, Starbucks should improve its technology and qualit6y of whole-milk-saturated products. Future Scenarios for Starbucks Current situation suggests that Starbucks should use effective pricing strategies in order to ensure its stable market position in the UK. For many manufacturing operations, variable costs tend to be high as a percent of the selling price. In such cases, a price increase may be more profitable than a price decrease because the required sales increase to make the same level of contribution is quite high and possibly unattainable, whereas the company may believe that the price increase will not result in a sales loss of large enough magnitude to make the decision unprofitable. Even in cases where additional fixed costs will be incurred, it is better from a decision-making point of view to ignore fixed costs to determine the price and then evaluate whether the resulting contribution covers fixed costs. The fallacy of including fixed costs in setting the price should be clear. The fixed cost per unit is larger when fewer units are sold and smaller when more units are sold. This calls for increasing the price when the firm sells fewer units and decreasing the price when the firm sells a larger number of units. Increasing the price could result in the firm selling even fewer units which will lead to increasing the price further because the fixed cost per unit increase (Hollensen, 2007). Traditional marketing strategies such as unique products also fit this model. For Starbucks to be successful with a new product, it must be able to acquire customers at a low enough costs so that future sales will pay for the initial investment. But more importantly, firms are betting on certain retention rates to justify the initial customer acquisition costs. By framing marketing strategy in terms of the parameters used in the fundamental equation of customer equity, we force firms to assess how sustainable their strategy is and where it is vulnerable. The fundamental equation serves as a framing device to make marketing strategy less qualitative and more rigorous (Johnson and Scholes 1998). Conclusion Customer-responsiveness is one of the main strategic tools which could help Starbucks to achieve a competitive position and sustain its strong brand image. Essentially, according to the conventional approach, buyers evaluate brands on some common perceptual dimension, they judge their value according to fixed preferences, and they select the brand that offers the highest utility. Considering consumer learning and market-driving strategies reveals that perceptions, preferences, decision making by buyers, and the nature of competitive advantage change A brand value network provides a simple yet clear summary of the value buyers derive from the perceptions they observe. It shows importantly that buyers seek multiple goals in making a purchase. It is these multiple goals that often times make being a buyer so difficult. Different brand, being perceived differently, will contribute to a largely dissimilar set of goals beyond basic functionality, making functionally comparable products, in fact, largely incomparable in terms of value (Kotler and Armstrong 2005). Once established, a buyers brand value network can evolve as does the buyers perceptions of the brand (e.g., Volvo being seen as more sporty, less boxy), or as the buyer evolves, adding or changing the goals sought. Differences across buyer segments can also be captured as different goal structures, so that brand value networks can be constructed for different market segments. An entrepreneur must have exceptional abilities to create and control a significant networking standard. Microsofts holdover personal computer operating by stems represent an out of the-ordinary outcome akin to a typewriter manufacturers exclusive control over the lay out of a key board (McDonald, 2003). For Starbucks, a change in customer-responsiveness can cause a dynamic chain reaction, involving a whole sequence of events. Sometimes it helps managers to distinguish between market and nonmarket variables within environmental and decision variables, particularly in institutions whose strategy formulation entails aspects of political economy and administrative legislation. Often, the entire set of possible outcomes is obscure and difficult to determine (Paley, 2006). Moreover, if managers oversimplify the interrelationships involved, then they end up ignoring the combined effects of such chain reactions altogether. Conversely, combining environmental and decision scenarios computed along the interrelationship paths connecting the internal and external variables, Depending on the sales volume that a firm anticipates, it will adjust its sales force, supplies and distribution, equipment, and facilities to match the scale of its production. Coherent and consistent actions taken by its production, marketing, personnel, distribution, and procurement managers demand a shared vision of the intended production scale. Sharing common perceptions about a firms strategy is an important step toward coordinating implementation plans and managerial behavior. The use of specialized capital equipment makes vertical integration more profitable for large firms than for small competitors. Economies of scale permit reduced production cost, which is an important element in determining price. Low marginal cost, other things being equal, allows lower prices, which increase potential demand, which in turn supports increased production. If a customer requests that they be given a 5 percent price cut, guarantees to find at least a 5 percent cost savings. Managing market offerings is the process of putting products, services, programs, and systems together in ways that create the greatest value for targeted segments and customers (Pittengrew et al 2006). To understand the true extent of commoditization for their offerings, suppliers first should gain estimates of the value that customers receive, validate their own and competitors market pricing, and gain estimates of their share of their customers business. Suppliers should then consider supplementary services, programs, and systems as profitable sources of differentiation that can significantly change the way customers value market offerings. BIBLIOGRAPHY 1. Baye, M. R. 2002, Managerial Economics and Business Strategy, 6th Ed. Chapter 1, pp. 4-24. McGraw-Hill/Irwin; 4 edition 2. Crawford C. Merle. 2003. New Products Management. Irwin-McGraw Hill. 7th edition, 3. Fill, C. 1999. Marketing Communication: Contexts, Contents, and Strategies 2 edn. Upper Saddle River, NJ: Prentice Hall. 4. 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B. 2006, Managerial Economics: Analysis, Problems, Cases. Wiley; 8 edition. 14. Walsh, D. 2008, Starbucks pushes ahead with UK growth plans. The Times. August 4, 2008. http://business.timesonline.co.uk/tol/business/industry_sectors/leisure/article4453831.ece 15. UK coffee market set to double over the next 10 years. 2007. Retrieved 10 August 2008 form http://www.caterersearch.com/Articles/2007/05/23/313851/uk-coffee-market-set-to-double-over-the-next-10-years.html Read More