The Dilemma of Starbucks Coffee Company's Expansion in India - Case Study Example

Strategic Audit of a Starbucks Coffee Company I. Current situation A. Current Performance As for the current performance Starbucks has only a few stores in New Delhi and Mumbai. As for the current expansion in to current Southern cities through cinemas and Barista coffee bars might succeed but nevertheless the company is incurring losses across the globe due to variety of reasons. India is not an exception. There is much less to talk about profit related performance in India. Indian market operations have also been curtailed by the fact that local competitors have upped their stake in the market share through their own home-made brews such as teas and herbal drinks. The Indian experience has further been marred by recent government regulations such as the applied limits on foreign investors’ total paid-up capital share the company. In addition to these developments Starbucks in India has been under pressure for price revisions from local political authorities. In fact it’s the pricing strategy of the company that has put it in trouble in India. B. Strategic Posture Organization Mission “Make every coffee drinker who visits Starbucks leave with a smile by creating unique atmospheres at every location, providing satisfying products, and delivering our high standard of customer service with every cup of coffee.” (www.starbucks.com ) Corporate Objectives a) Brand recognition Starbucks is aspiring to be the most respected and recognized brand in the market. They are keen on expanding quickly in existing and new markets and have created Starbucks Coffee International (SCI) to facilitate this. Internal expansion is facilitated by their ability to form joint venture agreements with Starbucks stores outside the United States, the development of new stores in new global markets and working with local companies of high repute. b) Increase customer base Starbucks has realized that customers are their major asset. They lay great emphasis in creating their locations. Starbucks has realized that increasing profits is one of their major successors in time to come. Starbucks aim is to form relationships with renowned third parties who share their values and maintain high quality. c) Diversify products Starbucks is always in the process of experimenting and creating new products and services to satiate their customers. The greater portion of Starbuck’s sales comes from their coffees and Italian-style espresso beverages (Clark, 2007). Apart from coffee Starbucks also has a wide range of products that includes pastries, coffee-related accessories, sweets and equipment. They also started selling premium tea at their outlets. The company continues to expand on its repertoire of products by introducing candy bars and fruit juices that can be found in supermarkets. d) Lead in quality Starbucks is vertically integrated by manufacturing their coffee beverages literally from the ground up. They ensure that they confirm to the highest standards of growing, roasting, purchasing and delivery of coffee (Fellner, 2008). The Starbuck’s employees are well enlightened about coffee. They believe that this will allow them to serve their customers better. In fact Starbucks lays a lot of emphasis on good customer service and even started a “just say yes” principle to keep a high level of service. e) Increase market share Starbucks has realized that profitability is a major factor in their success. Developing existing markets is one way that could be achieved and also help Starbucks name to reach new markets. Starbucks is keen on opening new outlets in new markets where there is an opportunity to become the leading coffee retailer and develop more shares of the market. II. Corporate Governance A. Board of Directors Corporate governance refers to systemic control through policies, rules, customs, practices, procedures and so on of the business organization by either shareholders, i.e. owners or the management (Schultz, and Jones, 1999). Minority shareholders tend to be treated differentially under each system. While the former tends to favor minority shareholders to a certain extent, the latter tends to ignore or sideline them at annual general meetings (AGMs). Strategic corporate governance capabilities of Starbucks include the company’s long term initiatives on meeting its sustainability related obligations and empowering stakeholders to be more involved in corporate governance practices. As a result corporate responsibility has become the corner stone of all strategies and plans. B. Top Management Top management team constitutes the ‘core intelligence group’ within the organization. It is not only well informed and also makes crucial decisions with regard to resource management and resource allocation (Simon, 2009). At Starbucks these crucial decisions are basically made of a team led by its CEO and consisting of an inner circle of experts. This inner circle constitutes quality managers and financial experts. III. External Environment: Opportunities and Threats (SWOT) A. Natural physical environment: sustainability issues External environment of Google has exerted such great pressure on its operations during the past few years. As such environmental influential groups have been organized and that demand action by Starbucks in respect of external environmental sustainability programs such as recyclable packaging, awareness programs on protecting ozone layer and green concept. B. Societal environment a. Economic: Economic influences assume a very formidable dimension in the operational environment of Starbucks. While cost cutting exercises were not feasible at the existing Starbucks firm level, average and marginal costs could be reduced through expansion into the emerging markets. b. Technological: Technology plays a very pivotal role in the external competitive and operational environments of Starbucks. For instance Starbucks has adopted a highly efficient service delivery system against their rivals. c. Political-legal: The food & beverage market operations are highly susceptible to political influences. Also the legal environment of the food industry in the world has been influenced by a series of legislations including packaging, food color usage. d. Socio-cultural: Social factors like extraneous behaviors and religious/cultural tendencies have been accommodated with multicultural staff of Starbucks. C. Task environment a. Threat of new entrant: Threat of new entrants is high in this market though differentiating the products Starbucks can retain their customer loyalty and relationship and can create some entry barriers for new entrants. b. Bargaining power of buyers: Due to the large number of alternative coffee suppliers and substitute beverages, it has created more power to the buyers because most of the products are undifferentiated with low switching cost. c. Threat of substitute products or services: In the coffee industry numerous substitutes exist in the form of price competition and customers can switch on to the other substitute products if those drinks are able to satisfy the same need, e.g. tea, herbal drinks. d. Bargaining power of suppliers: Starbucks has to procure supplies from suppliers in the open market where rules of competition might threaten to its own strategic objectives. e. Rivalry among competing firms: Competition among the existing competitors in the industry itself is a most significant force and Starbucks has to face big competition from many rivals. f. Relative power of unions, governments, special interest groups: The ever increasing tendency to legally regulate industrial relations and a lower level of collective bargaining, i.e. employees of an organization usually represented through a union and the employer coming to an agreement on terms and conditions on such matters as pay, work conditions and so on. D. Summary of external factors (EFAS) (SWOT) External Factors Weight Rating Weighted Score Comments Opportunities Indian middle class, 200 million. Income elasticity of demand for coffee in India. Niche market development possibilities in the South and the West. 0.25 0.15 0.20 5.0 3.0 4.1 0.91 0.45 0.82 Opportunities in the Indian market are much less right now. Threats Price elasticity of demand for coffee. Demand for the nearest substitution tea. Consumer trends towards more healthy ways and away from caffeine. 0.08 0.07 0.09 1.4 1.3 3.0 0.9 0.8 0.27 There are many threats coming from the local competitors, especially substitutes like tea and herbal drinks. IV. Internal Environment: Strengths and Weaknesses (SWOT) A. Corporate Structure It has adopted a decentralized organizational structure that encouraging employees to be independent with a degree of freedom given to ensure operational independence. In fact the top management encourages greater participation in the decision making process of the company for the employees. B. Corporate Culture Internationally accepted HRM practices that are associated with culturally diverse staff have been fully implemented at Starbucks and it has adopted such practices as Training & Development, skills reorientation, job enrichment, acculturation, performance management and good compensation practices to retain the staff. C. Corporate Resources a. Marketing: Marketing strengths of Starbucks have been centered on going after customer-driven value creation efforts plus the cost-effective achievement of marketing synergies through an aggregation process that involves a series of customer-care points both within and without the organization. b. Finance: The parametric growth of innovative business strategies at Starbucks have been attributed to the company’s own concern for positive growth in such metrics as sales, revenue, profits and market share. c. R & D: The ever increasing Research & Development (R&D) expenditure of Starbucks would confirm that resource variation is maintained by it in order to build up an inventory of inimitable resources. d. Operations & Logistics: The well planned operations and logistics at Starbucks presupposes that each department would possess a distinctly unique set of resources and connected capabilities thus giving it an advantage in cost over its rivals. e. HRM: The typical organization like Starbucks adopts a similar strategically determined functional variant of HRM models that are basically culturally diverse and internationalist in nature (Filipczak, 1995). f. IT: Modern technology matters not only in fast service delivery but also in communication practices. Starbucks is a super brand with modern technology as the basis of service provision. D. Summary of Internal Factors (IFAS) (SWOT) Internal Factors Weight Rating Weighted Score Comments Strengths High brand equity More empowerment among the employees with high satisfaction. Exclusive coffee products. Economies of scale in purchasing 0.12 0.1 0.8 0.1 5.0 4.0 4.0 4.0 0.6 0.4 0.32 0.4 The company has many strengths. Weaknesses High labor turnover High prices Over dependency on coffee & related products 0.20 0.12 0.1 4.0 1 3 0.8 0.12 0.3 Its weaknesses are much less. V. Analysis of Strategic Factors A. Situational Analysis The internal and external environment in which a business operates could bring about strengths and opportunities which Starbucks could make use of, and also weaknesses and threats which could harm a business. In order to make use of strengths and opportunities or to respond to weaknesses and threats, Starbucks needs to have the right resources and capabilities in proper order (Bussing-Burks, 2009). However high brand equity of Starbucks and its exclusive coffee products will be directly affected on present and future performance of the business. B. Review of Mission and Objectives Core competencies define capabilities that are vital for a business achieving competitive advantage. It should be realized that competition among businesses is a race for competence mastery as it is for market power and market position. As the senior management is not in a position to concentrate on all actions of a business and the capabilities that are needed to undertake them, the idea is to pay attention on capabilities that truly affect competitive advantage (Behar, 2007). However mission and objectives of Starbucks is appropriate for their future expansion possibilities and satisfying the global customers. VI. Strategic Alternatives and Recommended Strategy A. Strategic Alternatives (TOWS Matrix) Strategic alternatives of the organization should involve all management functions and corporate decisions. Starbucks would have to initiate its strategic functional processes and systems in keeping with its own strategic competitive environment as determined by SWOT analysis (Marques, 2008). For instance internal organizational arrangements for communication, quality management, internal value chain management, employee relations, HRM function, budgetary control, cash flow management, motivation and so on will have to be aligned with organizational goals. Also Starbucks would have to take into consideration the competitive environment and available choices. These capabilities have been noticed to exist at Starbucks right now. B. Recommended Strategy Corporate strategies and policies have both a functional and a causative element in them while corporate strategies are goal-oriented plans that incorporate the former. Corporate strategy is an approach to future that involves “(1) examination of the current and anticipated factors associated with customers and competitors (external environment) and the firm itself (internal environment), (2) envisioning a new or effective role for the firm in a creative manner, and (3) aligning policies, practices, and resources to realize that vision”. Starbucks thus are faced with strategic internal, external and inter-firm factors that force them to adopt certain policies to position themselves in the market with strategic orientation towards the achievement of long term corporate goals. An important objective of a strategic audit is to ensure that the business portfolio is strong and that business units requiring investment and management attention are highlighted. This is a vital factor. A business should always find out which markets are most attractive and which business units have the ability to achieve advantage in most attractive markets. In this sense Starbucks corporate strategy is the fundamental strategy that seeks to reorient its strategic competition policy while at the same time maximizing the synergy related benefits arising from an acquisition or a merger. This is what Starbucks should adopt in the Indian market. This is part and parcel of the whole corporate strategy of ensuring the growth of its market share and profit margins. This can be the very idea behind the Starbucks performance success in India. VII. Implementation The Board of Directors at Starbucks need to be identified a series of corporate initiatives to be implemented in keeping with their strategic plans. SWOT analysis enables the organization to plan and execute its programs of action with a degree of certainty about the external environmental factors that influence its own existence. The auditing of resources, value chain analysis and core competence analysis facilitate in identifying the strategic abilities of a business (Chung, 1999). After completing the above given analysis questions can be asked so as to find out how the business is faring overall. VIII. Evaluation and Control India consists of a large middle class of about 200 million. Surveys have indicated that the greater majority in this middle class can afford to go to a high class coffee restaurant such as Starbucks on a regular basis. However adversity to anything that is foreign, particularly by some religious factions means that promoting high class restaurants such as Starbucks on a grand scale is not possible. However niche market possibilities such as Bangalore, Chennai are possible. Starbucks lays great emphasis on brand recognition. Starbucks is trying to be the most recognized and respected brand in the market. Their main motive is to expand quickly in existing and new markets. It is also keen on increasing its customer base by expanding on its repertoire of products. Apart from coffee Starbucks also have pastries, sweets, coffee-related accessories, candy bars and fruit juices. REFERENCES 1. Behar, Howard. It's Not About the Coffee: Leadership Principles from a Life at Starbucks, New York: Portfolio Hardcover, 2007. 2. Bussing-Burks, Marie. Starbucks (Corporations That Changed the World).California: Greenwood, 2009. 3. Chung, ED. “When giants collide: strategic analysis and Application”. Management Decision.37.3(1999):233-248. 4. Clark, Taylor. Starbucked: A Double Tall Tale of Caffeine, Commerce and Culture. New York: Little, Brown and Company, 2007. 5. Fellner, Kim. Wrestling with Starbucks: Conscience, Capital, Cappuccino. New Jersey: Rutgers University Press, 2008. 6. Filipczak, Bob. “Trained by Starbucks and born to be wired”. Training Magazine 32.6, (1995):73. 7. Marques, Joan. “Spiritual performance from an organizational perspective: the Starbucks way”. Corporate Governance 8.3(2008):248-257. 8. Simon, Bryant. Everything but the Coffee: Learning about America from Starbucks, California: University of California Press, 2009. 9. Schultz, Howard, and Yang Jones. Pour Your Heart Into It: How Starbucks Built A Company One Cup At A Time. New York: Hyperion, 1999. 10. Starbucks Annual Report 2008, Retrieved from www.starbucks.com on February 15, 2010. Read More