Starbucks Strategic Capabilities - Case Study Example

Managing Strategy Table of Contents Table of Contents 2 Introduction 3 Overview of Starbucks 3 Part External Analysis 4 1 SWOT Analysis of Starbucks 4 5 1.2 PESTEL Analysis of Starbucks’ International Market 5 1.3 Competitive Rivalry 6 Part 2: Internal Analysis 7 2.1 Starbucks Strategic Capabilities 7 2.2. VRIO Analysis 9 2.3. Value chains 10 2.4. Does Starbucks match the critical success factors of beverage industry? 11 Part 3: Current Issues and Challenges Diagnosis 12 Part 4: Generation of Strategic Options 13 4.1 TOWS Matrix 13 4.2 Ansoff Matrix 14 Part 5: Evaluation of Strategic Options 15 Part 6: Description of Selected Strategy 16 Part 7: Conclusion 17 References 18 Introduction This report mainly represents a brief overview about the organisation of repute, Starbucks. It also includes a detailed description about the external and the internal factors related with the business environment in order to examine the market situation of Starbucks. Along with this, varied issues are also taken into consideration, which intend to create a significant influence over the growth prospects of Starbucks. It also focuses on generation and evaluation of varied strategic options in order to cope up with alternating challenges faced by the organisation in its current market scenario. Overview of Starbucks Starbucks Corporation is a global coffee retailing organisation headquartered in Seattle of United States (US). It was established in the year 1985 by three English partners named Jerry Baldwin, Zev Siegl and Gordon Bowker (Smith, 2007). It is one of the leading coffee house conglomerates in the world with a substantial reputation and corporate brand image (Bigboardnews.Com, 2012; Thompson & Shah 2010). Apart from beverage sector, it also deals in restaurants and entertainment division. Starbucks is the market leader in beverage sector in global market with annual revenue of $10.7 billion at the end of the year 2010 (Starbucks Corporation, 2009). Starbucks mainly attempts to offer most delicious coffee to its customers in order to inspire individuals in the targeted market (Starbucks Corporation, 2011). Part 1: External Analysis This part mainly endeavours to highlight the external environment of Starbucks with the help of strategic tools namely SWOT and PESTEL analyses. SWOT analysis is one of the most significant techniques utilised for examining the varied strengths, weaknesses, opportunities and threats of the organisation of Starbucks. 1.1 SWOT Analysis of Starbucks Strength: Leading market share holder Persuasive reputation in the global market Premium quality of products Highly efficient customer service Over 19,435 stores in universal prospective Product differentiation (Shahzad trading & consulting, n.d.) Weakness: Mainly present in US market High price of the products Limited customers Aggressive expansion may lead to monetary problems Self cannibalisation Lack of concentration on internal environment of the organisation Opportunities: Strong fiscal support High growth of economy New emerging markets in Russia, India and China Expansion to retail division Brand extension Technological advancement Threats: Saturation of US market Customer taste and preference might change Fierce competition Emergence of new entrants Coffee price instability in developing countries (Source: Auch-Roy, n. d.) Hence, from the SWOT analysis, it can be clearly depicted that even though Starbucks is a renowned organisation with a sustainable corporate image in international market, it includes certain limitations as mentioned above. Besides, it can also lead to varied threats as well due to alternative market trends and preferences amid the targeted customers. This might also result due to globalisation. Apart from SWOT analysis, another important technique utilised for evaluation of macro environmental factors is PESTEL. 1.2 PESTEL Analysis of Starbucks’ International Market Political Factors: Diverse relationships within coffee producing nations and US Change of environmental rules and policies Imposition of taxes in specific industries Varied new competitors in US market Economic Factors: Invariable demand for foods and beverages Customers purchasing behaviour might change Imposition of exchange rates and regulations Changes in customer incomes Probable reduction in the consumption rate of coffee in US market Social Factors: Changes in customer tastes and inclinations Alterations in lifestyles and income ranges of the consumers Changes in trends of the market Technological Factors: Advancement of Information technology (IT) Varied inventive equipments for the preparation of coffee Development in production of coffee beans Ethical Factors: Proper ingredients with due consideration to the taste of the consumer should be provided while preparing coffee Free from germs and pesticides Legal Factors: The Food Safety Act of 1990 Ensuring proper health of the customers Contaminated use of food stuffs might affect the identity of Starbucks Regular monitoring of the supply chain of Starbucks (Source: Ouattara, 2006) Hence, from the above PESTEL analysis, a detail overview about varied external factors which are most likely to have a substantial impact over Starbucks’ international operations can be evaluated in an appropriate way in order to understand the impact of these aspects on Starbucks. Thus, from this investigation, it can be clearly determined that there are higher prospects of expansion and development of Starbucks in future years. With reference to the PESTLE analysis, the prime factors which can offer a significant impact on Starbucks can be identified which is described below: Key Drivers of Change Change of customer desires due to globalization Improved technologies New rules and policies Cheap price 1.3 Competitive Rivalry Starbucks is one of the leading coffee retailing brands in the global context which positions itself as the market leader in food and beverage sector. The prime competitors of Starbucks in the market are namely Costa coffee, McDonald and Nestle among others. Hence, in order to retain its position, Starbucks has been observed to attempt offering the finest quality of products which might satisfy customer demands to the highest possible extent (Auch-Roy, n.d.). Part 2: Internal Analysis The internal business environment analysis includes evaluation of the inner factors of the coffee industry of Starbucks in order to examine valuable resources and abilities, which might be utilised to ascertain its strengths and weaknesses. According to Kotler & et. al. (2008), the internal analysis includes strategic capabilities of Starbucks highlighting its potencies in order to cope up with changing trends. It also spotlights on company’s value chain and fiscal performance as well (Kotler & et. al., 2008). 2.1 Starbucks Strategic Capabilities The section of strategic capabilities is divided into four distinct groups namely human resources, intellectual strategies, and financial performance which are described below briefly. 2.1.1. Human Resources The prime aspect which leads Starbucks to position itself as one of the leaders in the international coffee brewing industry is the dedication and commitment of its employees. Apart from this, uniform organisational culture is also another important factor which is responsible for the enhancement of employee devotion. Moreover, employee involvement in decision making process is another vital factor which helps in improving employee motivation thereby augmenting the productivity and profitability of both the organisation as well as the employees in the case of Starbucks (Starbucks Coffee Company, 2004). 2.1.2. Intellectual Strategies The organisation of Starbucks is recognized as a brand which attempts to fulfil customer satisfaction thereby enhancing the dependency and responsiveness of its consumers. It is necessary in order to retain its identity in the market among other potential competitors. Apart from this, diverse employees attribute is another crucial feature which acted as a strategic technique thereby enhancing competitive business advantage of Starbucks. Moreover, the ethical standards and corporate responsibilities of Starbucks also help in enhancing future strategies in order to amplify its market share (Starbucks Coffee Company, 2009). Hence, it can be clearly affirmed that the above described aspects facilitates Starbucks while implementing any strategy. 2.1.3 Financial Performance Inspite of great recessions, the financial condition of Starbucks is still quite significant due to its high reputation. It is in this context that the net revenue of Starbucks in the year 2011 was $11.7 billion along with earning per share of $1.62 percent. Moreover, the operating income also augmented in the year 2011 by $1,728 million which amounted to $1,698 in 2010. In addition, the total sales growth of the stores also increased from 7 to 8 percent in the year 2011 which indicates a strong financial reputation of the organisation (Starbucks Corporation, 2011). Financial Report Operating Income (Source: Starbucks Corporation, 2011) 2.2. VRIO Analysis (Source: SlideShare Inc, 2012) It can be revealed from the above figure of VRIO analysis of Starbucks, that the organisation can attain competitive advantages with the help of varied factors namely efficient allocation of resources through retails stores, brand identity and customers awareness. All these factors shall facilitate Starbucks to retain in its position among other rival firms in the market. 2.3. Value chains The term value chain is referred to as the sequence of activities performed by a firm in order to operate in particular industry. The final products pass through each and every activities of value chain in order to attain extra value which can satisfy customer desires. The value chain classifies the basic ‘value-adding’ activities namely inbound logistics, outbound logistics, promotion and sales, operations and services. Apart from this, it also includes certain supporting activities as well such as infrastructural facilities, technologies, human resource management and procurements. Notably, value chain helps to evaluate the contribution of each of the above mentioned factors. Moreover, it is also used as a strategic technique in order to access the distribution network which helps in evaluating the contentment level of the customers (Kotler, 2008). Value Chain (Source: Kotler, 2008) Starbucks follows a different strategy while attaining its competitive advantages. Starbucks attempts to offer its customers with high quality of products as compared to its other existing competitors. Moreover, Starbucks offers high concentration towards the requirements and demands of the customers with the aim to effectively satisfy them and thus maintain a long-term relationship with its customer group. It is due to this reason that customers offer worth to the image of Starbucks coffee, and agree to spend higher cost as well. Hence, it can be affirmed that total revenue of Starbucks is enhancing largely due to the strategy of providing finest quality of coffee to its worldwide customers (Lamb & et. al., 2006). Moreover, with the help of unique resources as identified by VIRO analysis, the distinctiveness of Starbucks can be improved. This can be possible only by alternating the atmosphere and ambience of the retail outlets which would augment customer attentiveness to a certain extent. It would also amplify the efficiency of Starbucks’ employees by influencing its overall organisational culture. 2.4. Does Starbucks match the critical success factors of beverage industry? Critical success factors Does Starbucks comprise of strategic capabilities to match it? High brand recognition Yes Innovative products Yes Brand image Yes Customer awareness Yes Providing products at low price No Part 3: Current Issues and Challenges Diagnosis Current Issues Challenges Faced High priced products Limited customers Mainly located in US market Fiercely competitive market Varied new competitors such as Costa Coffee and McDonalds Diverse laws and regulations Alterations in taste and preferences of customers Differences in income ranges Changes in patterns of target market Technological changes The above figure describes the current problems which Starbucks is facing in-spite of its renowned market share. As it is a premium brand, it comprises of very limited amount of customers. Along with this, Starbucks also targets to a particular group of consumers including the population with high earnings and spending capacity. Moreover, it is mainly present in US as compared to others international markets. Apart from these issues, Starbucks might face certain other problems as well. For instance, due to the rapid innovations in the IT sector, Starbucks might monitor a serious impact in its operational process. In addition, due to recession, the incomes of the customers might decline thereby reducing their spending power which in turn is quite likely to hamper the profitability of Starbucks. Introduction of laws and rules might also offer strong influences on the operation of Starbucks, thereby hindering the prosperity and reliability. Hence, Starbucks should attempt to implement IT in its organisational culture in order to cope up with these specified difficulties along with bringing sustainable changes within its international business environment. It is very essential for Starbucks as it would facilitate in enhancing the individuality of the brand in its target market. Part 4: Generation of Strategic Options 4.1 TOWS Matrix Strengths S1: Offer good atmosphere to customers S2: High market expansion to China, India S3: Excellent services Weakness W1: High price W2: Non availability of products in supermarkets W3: Less promotion Opportunities O1: New emerging markets O2: Modern infrastructure O3: Demand for good quality products O4: Demand for safe products SO strategies S2, O1, O2, O3 In order to attract more and more customers in the new targeted markets, Starbucks should offer more concentration on the quality of products and services S3, O4 Starbucks should intend to offer safe products, in order to increase the demand of the products WO strategies W1, W2, O1, O2 Starbucks should attempt to reduce the price so that it can be accessed by all customers W3, O3, O4 Increase promotion in order to enhance the demand of products Threats T1 Inflation increases the demand of cheap products T2 Increase of hyper and super markets ST strategies S1, T1, T2 Starbucks should attempt to change its marketing strategies in order to reduce its prices and to compete with its existing rivals WT strategies W1, W2, W3, T1, T2 New innovative products of high quality and low price, which can be accessed in super markets as well (Source: Scribd Inc, 2012) 4.2 Ansoff Matrix Products Present New Market (Source: Starbucks Coffee Company, 2010) From the above presented Ansoff Matrix, it can be clearly affirmed that Starbucks is attempting to expand its business, thereby penetrating into new markets with current and new products in order to increase its ranges of customers. This is done in order to enhance its potential also in other markets as compared to the US. Part 5: Evaluation of Strategic Options In evaluating the varied strategic options, Boston Consultancy group (BCG) matrix is utilized. Market Share High Low H Market growth L (Source: Scribd Inc, 2012) BGC matrix includes four separate divisions or quadrants namely Question Mark, Star, Cash Cow and Dog. It is utilised in order to evaluate the current condition of the organisation, Starbucks in this paper. Strategic Option or quadrant (I): Question Marks: It shows high market growth but low position in the market. It is not a suitable option for Starbucks as all of its products are preferred by customers so it has a high market image and positions itself in global scenario. Strategic Option or quadrant (II): Star: It demonstrates long term growth prospects for the organisation. This is the most suitable option as net revenue of Starbucks in 2011 amounted to $11.7 billion and total sales were also observed to enhance by 8 percent. This clearly depicts that Starbucks is a star organisation with highest industry share and growth rate. Strategic Option or quadrant (III): Cash Cow: This option portrays soaring market share but low growth. This is also not a suitable choice for Starbucks because due to the introduction of innovative products, its demand in the market has improved to a certain extent. Strategic Option or quadrant (IV): Dog: This portrays low market share and development. It is also not a favourable choice for Starbucks as it is attempting to magnetize more consumers by offering them diverse products and thereby amplifying its corporate position. Part 6: Description of Selected Strategy Starbucks should attempt to follow the strategic option or quadrant (II) as discussed in the above section of BCG matrix. It includes the ‘Star Position’, which would help to enhance the efficiency and effectiveness of the organisation in the international market. Thus, it would also facilitate Starbucks to improve its array of customers, thereby expanding into fresh markets. Along with this, introduction of varied new product lines also act as a significant factor to improve the brand portfolio among other opponents. Besides in order to do so, extensive promotion is required in order to increase awareness of the customers along with better availability of products in supermarkets. Better strategic policies should also be implemented in order to serve the offered products as well as services in a cost efficient way. Thus, these above described strategies might prove beneficial for Starbucks to retain its foothold in the targeted market in its long-run. Hence, this option would pave the path of success for Starbucks. Part 7: Conclusion Conclusively, it can be avowed from the above discussion that in order to sustain in this competitive market, it is essential for Starbucks to implement varied strategic alterations to diminish its price ranges. This is because, inflation reduced the earnings of the citizens and so they prefer cheaper products as compared to premium brands. This can only facilitate Starbucks to compete with other rival firms in the market. References Auch-Roy, H. R., No Date. The Starbucks Corporation: Past, Present and Future. SWOT Analysis. [Online] Available at: http://www.calarosbay.com/files/StarbucksCaseStudy.pdf [Accessed March 24, 2012]. Bigboardnews.Com, 2012. Starbucks Concept Store is a Lab for Reinventing the Brand. News. [Online] Available at: http://www.bigboardnews.com/2012/03/12/starbucks-concept-store-is-a-lab-for-reinventing-the-brand/ [Accessed March 24, 2012]. Kotler, P. & et. al., 2008. Principles of Marketing, 12/E. Pearson Education. Lamb, S. & et. al., 2006. Starbucks Corporation (SBUX). Value Chain Analysis. [Online] Available at: http://mmoore.ba.ttu.edu/ValuationReports/Fall2006/Starbucks.pdf [Accessed March 24, 2012]. Ouattara, A. & et. al., 2006. Starbucks Brazil. PESTEL Analysis. [Online] Available at: http://pierre.benain.free.fr/MBA698%20Starbucks%20in%20Brazil%20Report.pdf [Accessed March 24, 2012]. Smith, O., 2007. Starbucks Corporation Building a Sustainable Supply Chain. Company Background. [Online] Available at: http://www.gsb.stanford.edu/scforum/login/abstracts/documents/GS54.pdf [Accessed March 24, 2012]. Starbucks Corporation, 2009. Starbucks Investor Relations. Financial Release. [Online] Available at: http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-newsArticle&ID=1492291&highlight= [Accessed March 24, 2012]. Starbucks Corporation, 2011. Our Starbucks Mission Statement. Information. [Online] Available at: http://www.starbucks.com/about-us/company-information/mission-statement [Accessed March 24, 2012]. 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