Chapter 3 Information Systems, Organizations, and Strategy 129

TECHNOLOGY HELPS STARBUCKS FINO NEW WAYS TO COMPETE

Starbucks is the world's largest specialty coffeeretailer, with over 1,700coffee shops in 55countries. For years, Starbucks grew throughoutthe United States and internationally, openingfranchises at an impressive rate. From 2002 to 2007alone, the company tripled the number of stores itoperated worldwide. Starbucks offers a unique expe-rience: high-end specialty coffees and beverages,friendly and knowledgeable servers, and customer-friendly coffee shops. This was a winning formulafor many years and enabled Starbucks to chargepremium prices.

During the economic downturn beginning in 2008,profits plunged. Customers complained that the com-pany had lost its hip, local feel and had become morelike a fast-foodchain. Many coffee drinkers went insearch of cheaper alternatives from McDonald's andDunkin' Donuts for their coffee fixes. Starbucks stocklost over 50 percent of its value by the end of 2008.Major changes were in order.

Starbucks seized the opportunity to overhaulits business by using severaldifferent strategiessimultaneously. First, the company has revampedits in-store technology and sought to integrate itsbusiness processes with wireless technology and themobile digital platform. Also, rather than copy thepractices of competitors, Starbucks pursued a moreaggressive product differentiation strategy, intendedto emphasize the high quality of their drinks andefficient and helpful customer service. At the sametime, however, Starbucks also focused on becoming'lean', like many of their competitors, eliminatinginefficiency wherever possible.

When Starbucks set out to improve its customerexperience, it found that more than a third of itscustomers are active users of smartphones. Thecompany set out to implement several features andimprovements that would appeal to this segmentof its customer base. First, Starbucks implementeda technology that allows customers to pay usinga smartphone app. The app is integrated with theStarbucks Card system, which allows regular cus-tomers to pay with a pre-paid and rechargeablecard at any Starbucks branch. When customersmake a purchase using the app, a cashier scans abar code displayed on the phone, and the resultingsale is charged to the customer's Starbucks Card

account. Customers report that paying using thisapp, available for all major smartphone operat-ing systerns, is much faster than traditional formsof payment. In its first 15 months of use, theStarbucks mobile payment system processed 42million transactions.

Many of Starbucks' most loyal customers regu-larly spend time using the free Wi-Fiwirelessnetwork offered in each store. A majority of thesecustomers also use mobile devices to connect to thein-store Wi-Finetworks. Recognizing this, Starbuckslaunched what it calls the "Starbucks DigitalNetwork," a portal designed specifically for mobiledevices as opposed to traditional Webbrowsers. Thesite is optimized for all major smartphone operat-ing systems (iOS,Android, and BlackBerry), andresponds to the multi-touch capability of deviceslike the iPad.

The Starbucks Digital Network site was devel-oped in partnership with Yahooand functions as acontent portal. Starbucks customers using the sitewill receive free WallStreet Journal access, selectfree iTunes downloads, and a wide variety of othercontento The site will integrate with Foursquare,a location-based social networking site for mobiledevices. This arrangement will allow users tocheck in and receive award points using Starbucks'site. Because Starbucks has the most Foursquarecheck-ins of any company to date, this feature hasbeen popular with customers.

Rather than serve ads on the site, Starbucks hasopted to offer the site free of advertising, hopingthat striking deals with content providers will makeit a profitable venture. Even if the Starbucks DigitalNetwork is not highly profitable, analysts sug-gest that the site is an effective way for Starbucksto improve its relationship with its most valuablecustomers and a creative use of the mobile digitalplatform to enhance customer satisfaction.

In addition to revamping their business to betterserve the needs of their mobile users, Starbuckshas made a concerted effort to become moreefficient, reduce waste, and use the time savedto provide better customer service. Starbucks setout to streamline the business processes used ineach of its stores so that baristas do not need tobend down to scoop coffee, cutting down on idle

130 Part One Organizations, Management, and the Networked Enterprise

time while waiting for coffee to drain, and findingways to reduce the amount of time each employeespends making a drink. Starbucks created aIOperson "lean tearn" whose job is to travel the coun-try visiting franchises and coaching them in leantechniques made famous by automaker Toyota'sproduction system.

Store labor costs Starbucks about $2.5 billion,amounting to 24 percent of its annual revenue. IfStarbucks is able to reduce the time each employeespends making a drink, the company can makemore drinks with the same number of workers orwith fewer workers. Alternatively, Starbucks coulduse this time savings to give baristas more time tointeract with customers and hopefully improve theStarbucks experience.

Wireless technology enhanced Starbucks' busi-ness process simplification effort. Starbucks districtmanagers use the in-store wireless networks to runstore operations and to connect to the company'sprivate corporate network and systems. Starbucksdistrict managers were equipped with Wi-Fi enabledlaptops for this purpose. Before the in-store wirelessnetworks were implemented, a district managerwho oversaw around 10 stores had to visit eachstore, review its operations, develop a list of itemson which to follow up, and then drive to a Starbucksregional office to file reports and send e-mail.Instead of running the business from cubicles inregional headquarters, Starbucks district managerscan do most of their work sitting at a table in one ofthe stores they oversee. The time saved from goingback and forth to regional offices can be used toobserve how employees are serving customers and

CASE STUDY QUESTIONS1. Analyze Starbucks using the competitive forces

and value chain models.2. What is Starbucks' business strategy? Assess the

role played by technology in this businessstrategy.

improve their training. Implementing Wi-Fitech-nology enabled Starbucks to increase the in-storepresence of district managers by 25 percent withoutadding any extra managers.

In 2008 and 2009, the weakened economy forcedStarbucks to close 900 stores, renegotiate somerents, cut prices on some of their big ticket items,and begin offering price-reduced specials, such asa breakfast sandwich and a drink for $3.95. Costreductions frorn procedural changes made it pos-sible for Starbucks to offer these lower prices.

Major fast food chains already used thesetechniques. While some baristas have resistedthe changes, and analysts were skeptical that thechanges would take hold, Starbucks attributes muchof its recent uptick in prafits to its efforts to go lean.Starbucks CEOHoward Schultz said that "the major-ity of cost reductions we've achieved come from anew way of operating and serving our custorners,"and also added that the time and money saved wasalso allowing the company to improve its customerengagement. By 2011,Starbucks had returned toprofitability and continuing growth, with plans toopen 500 new stores, in large part because of thesuccess of each these changes.Sources: "Starbucks Corporation," The Neto York Times, January26, 2012; Mark Raby, "Starbucks Mobile Payments Hit 42Million,"Mark Raby, "Starbucks Mobile Payments Hit 42Million,"SlashGear, ApriJ 9, 2012; Trefis Team, "Starbucks Brews UpSmartphone Payment Platform," Forbes, February 7,2011; http://blogs.forbes.comi greatspeculationsl2011 102117 I starbucks-brews-up-smartphone-payment-platforml; Ryan Kim, "Starbucks' NewPortal Designed with Mobile in Mind," Businessioeek, September2, 2010; Starbucks Form 10-K for Fiscal Year ended October 2,2011;Julie Jargon, "Latest Starbucks Buzzword: 'Lean' JapaneseTechniques," The Wall Street [ournal, August 4, 2009.

3. How much has technology helped Starbuckscompete? Explain your answer.

on the Web. Profits have been dampened. Table 3.5 summarizes some of thepotentially negative impacts ofthe Internet on business firms identified by Porter.

The Internet has nearly destroyed some industries and has severelythreatened more. For instance, the printed encyclopedia industry and the travelagency industry have been nearly decimated by the avaiIability of substitutes