Strategy of Starbucks

Strategy of starbucks

Submitted to : Daniel Valentine

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Strategy of Starbucks

Executive Summary

Johnson, Scholes and Whittington (2006, p.9) defines strategy as, “strategy is the direction and

scope of an organization over the long term; which achieves advantages for the organization

through its configuration of resources within a challenging environment to meet the needs of

markets and to fulfill stakeholders expectations. In simple words what organization want to be,

what resources it posses and how efficiently it manages its resources to satisfy customers and

investors. This is assignment tries to ascertain the strategies adopted by Starbucks, the retail giant

in coffee retail industry. What are the factors that contributed towards the growth of this

organization, whether it had positive or negative performance of the company and tries to

suggest few viable strategic options which they can employ in order to grow, suggested strategic

measures are based on the analysis of the organization by using various strategic tools developed

over the years by eminent strategist. Opportunities, threats, strength and weakness are derived

through external and internal factor evaluation matrix.

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Strategy of Starbucks

1.Introduction

Company A world phenomenon which started in 1970 from Seattle’s historic pike place market.

The name of this phenomenon is inspired from classic novel about whaling industry.

Howard Schultz is the man behind this occurrence, that claims 7, 521 company owned,

5,647 licensed stores in 41 countries. SBUX or Starbucks as we all know. Acquisition of 65

Seattle coffee company in 1998 made it possible for Starbucks to enter UK market

Mission statement of Starbucks

“To inspire and nurture the human spirit – one person, one cup and one neighbourhood

at a time.”

To grow SBUX invested in human resources, technology – to give hi-fi and better control of

stores which increased in number day by day, stores – minute details which included fixtures and

fittings, illumination, location – the principle of “everything matters”. Sales sky rocketed with

new outlets being opened. The company ventured out into almost everything from restaurant,

coffee shop, music (Starbucks, 2010).

With this cluster spoke and hub model each outlet began to eat flesh of each other which resulted

in downward movement of sales. The chart given below depicts revenue growth for the period

June 2000 to June 2008.

( Seekingalpha,2010)

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Strategy of Starbucks

However rapid store expansion is not the only cause for this downward trend, let us try to

analyze what factors or elements contributed to success and failure of SBUX strategy to grow by

rapid expansion

2. The Strategic Triangle

Sustainable Competitive Advantage is the mantra for any business organization in order to

operate and be successful in this fierce competitive market. We will be using strategist guru

Ohmae’s 3 C’s model. 3 C stands for:

a) Corporate

b) Customer and

c) Competition.

Food and beverage retail chain Starbucks came up with their strategy after analyzing each one of

the above element

2.1 Corporate strategy

SBUX is basically a company involved in importing; roasting and selling coffee beans,

when Howard Schultz bought Starbucks in 1987 he merged his espresso café bars with

Starbucks, he did this to gain advantage of the name “Starbucks” which was known for selling

quality roasted coffee beans among the customers. SBUX began operations with focus to be

different, it adopted the strategy of differentiation and were selling atmosphere ‘a unique third

place’ to its customers. The relation between employees and management was also unique, the

strategy of extending medical benefits to part timers prove this point. SBUX is the retail chain

which started loyalty programme for customers, offered free wireless internet connection while

enjoying the atmosphere. Starbucks reaped benefits from the strategy of differentiation

The following financial data of Starbucks proves this

Year EBIT (in millions)

2003 432.47

2004 620.63

2005 796.35

2006 906.24

2007 1,056.36

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Strategy of Starbucks

2008 455.7

2009 559.9

It may be noted that the period during 2008 – ’09, EBIT was reduced to 455.7 and 559.9

millions, it not only due to economic recession. With rapid expansion, the strategy of Starbucks

changed from catering elite customers who relished coffee to convenience for mass customers

by increasing number of outlets within 5 mile distance. Starbucks met failure in music industry

when it tried to sell through CD burners because SBUX did not have any competitive advantage

over others even when it had one or two exclusive music labels. Then it also faced similar

reaction from loyal customers when it moved into restaurant industry offering breakfast as it

deviated from the core business of promoting good quality coffee but bottled cold coffee got

good response.

2.2 Customer

One of the most important factors for any business institute is it has to divide their market share

depending on the needs of the people to whom they cater. It is advisable to identify potential

customers and area before opening outlet at a random basis, Starbucks is known for possessing

the right device to identify particular structure in certain areas that could earn them revenue.

Schultz believed that there are customers for every 5 mile and thus demand for coffee is there.

Starbucks sliced customer stomach share based on the needs of the customer like high quality

coffee for those who enjoy freshly brewed coffee, coffee brewing equipment and accessory for

those people who want to make coffee at home, occasionally offering variations in coffee to cater

people who wish to have coffee varieties, tea and specialty tea for people who do not enjoy

coffee much. Starbucks have successfully sliced and continue to serve each customer. This is the

major factor that contributed to increase the revenue of SBUX

2.3 Competitors

Strategy employed by Starbucks helps it to be differentiated from its competitors be it customer

devotion, employee retaining or supplier pride. The strategy employed by SBUX to reduce

competition from competitors and new entrants is to make industry look like matured and further

growth not possible, this is done by acquiring existing small cafe players and increasing number

of their cafes. A customer keeps coming back to stores to enjoy new unique experience which

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Strategy of Starbucks

Starbucks rival cannot offer. Starbucks is the global leader and others imitate this brand whether

it is the product offered, programmes aimed to attract employees, customers and vendors.

However in UK, Costa Coffee, the national retail chain retains number one position in terms of

number of outlet, customer satisfaction.

After analyzing what organization wants to be and how it achieved we have to do opportunity

and threat analysis based on identification of opportunities and threats through External Factor

Evaluation (EFE) Matrix. Following are some of the opportunities that can be exploited by

SBUX after overcoming certain threats which is mentioned at later stage.

3. Opportunity and threat analysis

3.1 Opportunities

SBUXs main area of operation is selling coffee beans and SBUX is the name in coffee retail

industry. Uniqueness is the element that brings customers back to SBUX, loyal customers

already got that experience; they want something new which is again unique. SBUX has an

opportunity to develop and launch new products such coffee flavoured alcoholic beverage like

beer or wine. It can also launch products like coffee flavoured butter. The next possible prospect

is to avoid ignorance and venture into new emerging economies. Venturing into new emerging

economies like India, China will give competitive edge over its competitors when they enter

those markets. SBUX can exploit this option to their advantage as product offered is accepted all

over the world that means less risk to organization and minimal cost involved in terms of

research and development. For growth in UK, Starbucks can focus to develop outlets outside

high street or to buy small independent outlets and keep neighbourhood café repute of those

small independent outlets. It will gain two points one on account of motivating partners, wearing

uniform and performing same routine task de-motivates baristas to work as there is no new

uniqueness in their job and second customers will start to accept retail giant as neighbourhood

café where interaction between customer and barista is more important and not uniformed

baristas performing boring routine job.

However to open this opportunities, the chain has to overcome certain threats. These threats can

create huge impact if not dealt and the success of SBUX greatly depends on the fact, to what

extend SBUX can keep themselves immune to the effects from these threats.

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Strategy of Starbucks

3.2 Threats

As with any organization, Starbucks too faces growing competition from other organizations like

Costa, Café Nero and fast food giants like Mcdonalds offering cheap coffee with more or less

same quality in service and coffee. With no special knowledge required any measure adopted by

Starbucks will be imitated by competitors. SBUX should come with different product or service

in order to lead the industry. Secondly Starbucks import coffee beans, lack of coffee growing

plantations and importing coffee beans or non availability of coffee bean due to political factor

like ban in import from certain country can lead to a situation where SBUX is forced to increase

its coffee prices in order to pay for its suppliers or it can lead to situation where Starbuck is

forced to halt its operation. And last one, recent economic meltdown forced SBUX to rethink its

expansion plans and to adopt measures to cut cost. SBUX should look for optimum use of

resources (Prynn,J., 2009)

Having understood the opportunities that is available and threats that can force the giant to halt

its operations; we have to analyze bargaining power of each element like customer, supplier and

rivals. It is equally important for us to understand what are the strengths that can help SBUX to

exploit the opportunities, the weakness that has to been hidden from the rivals in order to avoid

being exploited. Both Bargaining power and Strength and weakness analysis helps to adopt

appropriate strategic decision based on strategic triangle analysis.

4. Bargaining power Analysis

4.1 New Contestant

Coffee retail industry is an industry wherein any new contestant can come in easily as no

special technical know-how is needed. The new contestant just need coffee machine which are

easily available in the market. Anyone with a small capital investment with some experience in

managing a store can start new café. These pose a serious threat for Starbucks; as majority of

outlets are high street based in UK. New contestant can establish an outlet in non- high street

area and thus gain advantage of first mover. However SBUX have some advantage over new

contestant that can be passed on to customers to win their loyalty. Being a giant SBUX enjoys

the economies of scale as they import large quantity of coffee beans in order to meet their

demand for cafes as well as for selling roasted whole beans. Passing some benefit of economies

of scale together with promoting or creating awareness among the customers will help SBUX to

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Strategy of Starbucks

retain old as well as new customers to its outlet. The power of new contestant is minimal as

SBUX focuses on differentiation which an advantage.

4.2 Vendor

SBUX hugely depends on its vendors for coffee beans in spite of this Starbucks have the upper

hand over their vendors. Starbucks import quality coffee beans from various coffee producing

nations such as Brazil, Indonesia, Columbia, Rwanda etc. Individual Vendors from particular

country does not have much influence over SBUX. This is quite evident when Starbucks recently

announced that they will only sell espresso based drinks which are made from fair-trade certified

coffee bean in UK.

4.3 Standby products

There are numerous standby products like tea, chocolate, energy drinks etc which is a

disadvantage for the company. A change in trend caused due to various factors such as a research

suggesting too much coffee consumption is harmful to health or change in preference of

consumers towards fresh fruit juices can have cascading effect on the business of SBUX.

4.4 Contender

The influence of contenders is minimal. The retail industry looks like mature with lot of

competitors (Costa, Nero, Pret) competing with each other. The differentiation in products or

service that is offered by contenders is diminutive. The contenders seem to imitate what

Starbucks does, therefore no serious threat is posed by the contenders and any initiative taken by

Starbucks may be imitated by contenders.

4.5 Shoppers

The most important factor that has an influence on any organization is the power of shopper. An

individual shopper does not exert pressure on Starbucks, the bargaining power of an individual

shopper is very less which is an advantage for Starbucks however the cost of switching to

competitors is low, which can create negative impact if large number of SBUX decides to switch

to its competitor for cup of coffee (wylick, 2007)

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Strategy of Starbucks

5. Core Competence of Starbucks.

Prahald and hamel (1990) states, “… Managers will be judged on their ability to identify, cultivate and exploit the core competencies that make growth possible – indeed, they’ll have to rethink the concept of corporation itself”.

5.1. Personnel wherewithal.

The growth of Starbucks is depended on its partners (employee), only motivated and committed

partner can sell the atmosphere (product) that Starbucks is offering to its customer. De-

motivated, uncommitted partner cannot give that unique experience to its customers. To exploit

this, SBUX gave medical benefits to part time employees which other no other company did

foolowed by “ bean stock programe” which give employees their share in company’s growth

which in turn lead to efficient employees and organization with comparatively less staff renewal

rate. Less staff resignation combined with highly efficient employees was competitively unique

to SBUX. This gave advantage over their rivals. But due to monotonous nature of job together

with employees made redundant due to recent economic down turn resulted in dissatisfaction

among the partners or baristas which is one of core competence of company. Steps need to be

taken in order to retain its strength (hammers, 2010).

5.2 Starbucks repute.

SBUX gained popularity and became the most accepted brand in coffee (whole bean or brewed)

retail sector all over the world through its dedicated, motivated staff. Core competence element

of this organization lead into another, finally resulted in growth of the organization. There is

sense among the customers, staff, and investors that growth of SBUX offers them a lot benefits.

Customers are assured about the quality, staff about their future Career growth and investors

about their money and returns on it.

Core competence is the unique element that makes one organization different from others;

however there may be one or more strength that can be converted to an element in core

competence of the organization, thus we should know strength and weakness through Internal

Factor Evaluation (IFE) matrix.

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Strategy of Starbucks

6. Strengths and weakness.

6.1 Strengths

The first strength is brand awareness; Starbucks enjoys advantage of most well known and

accepted chain in coffee retail industry. Customers are assured about the quality whether the

outlet is in U.S, UK or Japan, the product offered is unfailing. Then the commitment of partners

towards Starbucks, partners are loyal and committed towards work as the company never faced

any strike or walkout by employees.

6.2 Weakness

Products are priced high when compared with prices of product offered by competitors, this is

mainly due to the role of currency (exchange rate of currency plays vital role as SBUX imports

coffee beans) and also because of high cost involved in offering that unique atmosphere.

Machine made coffees are not up-to the reputation of Starbucks (news.idealo, 2008)

7. Options available for future growth.

7.1 Be cost leader.

This option would help Starbucks to secure its dominance in market share and help to keep

competitors and new entrants at bay. This is the only objective that SBUX has not ventured till

now in market penetration segment in Ansoff matrix. However loyal customers may feel that

product changed, café for trendy customers repute may be lost as customers feel the brand got

diluted and may not provide small quality atmosphere. Moreover Starbucks is placed in

differentiation strategy in broad (industry wide) and focus strategy in narrow segment. At the

moment SBUX has adopted a combination of generic strategies. This is dangerous, as to be

unique and to serve mass customers is highly impossible.

7.2 Curtail loss making outlets and Venture into new market.

This is the most apt option for Starbucks to grow as it involves less risk and the product offered

is well known. This option helps to reduce loss and at the same time retain its strength which

gives sustainable competitive advantage over their rivals. SBUX is present in major countries

like US, Canada, UK, Japan, China and so on, however SBUX should look into options for

growth in countries like India, Russia. Starbucks is reputed for quality beverages and the

atmosphere which it sells. It will be a new experience for the target customers in these

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Strategy of Starbucks

economies and will accept the atmosphere that Starbucks sells. SBUX can open outlets in those

markets and the same time it can acquire small competitors.

7.3 Open New Outlets with New Products in Existing Market.

This option is quite risky, time consuming and drainage of economic resources of company. By

new outlet means it should be totally different from existing Starbucks outlet even the name

should be different from “Starbucks” or else customers may think it is just normal Starbucks

store and they may avoid it.

Conclusion

Starbucks is different from the rest not only in products they offer but also in terms of

relationship between the management and employees, customers, vendors. Strategy adopted by

Starbucks has helped immensely towards the growth of the organization. However if we place

Starbucks on a business life cycle, we can see that the product offered by SBUX has reached

matured stage where market saturates. It is extremely important for Starbucks to change their

strategy perhaps may change the product itself which they are offering. Starbucks should look

into the option of exploring new markets rather than focusing on innovating and launching new

products in existing market if it wants to be a dominant player. Since Starbucks is the most

copied organization, any measure adopted to increase market share in existing market can be

copied by its competitors and may gain advantage over Starbucks in other target economies or

market which will make market penetration very difficult for Starbucks.

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References

Hammers, M., (2010), starbucks is pleasing employees pouring profits [online], available at http://www.workforce.com/section/benefits-compensation/feature/starbucks-is-pleasing-employees-pouring-profits/ [accessed on 3rd November 2010].

Idealo, (2010), coffee shop review starbucks - café nero and costa-coffee compared [online], available at http://news.idealo.co.uk/news/3603/coffee-shop-review-starbucks-caffe-nero-and-costa-coffee-compared.html [accessed on 3rd November 2010].

Johnson, G., Scholes, K., and Whittington, R. (2006) Exploring Corporate Strategy, 7th edition, London:pearson-books.

Prahalad, C.K. and Hamel, G., (1990), The Core Competence of the Corporation, Harvard Business Review.

Starbucks,(2010), About starbucks [online], available at : http://starbucks.co.uk/en-GB/_About+Starbucks/Starbucks+in+the+UK.htm [accessed on 24th October 2010]

Seekingalpha, (2010), Starbucks revenue growth [online]. Available at : http://seekingalpha.com/article/206270-starbucks-slower-growth-ahead [accessed on 10th november 2010].

Smale,W., (2008), Why Starbucks' sales have gone cold[online], available at http://news.bbc.co.uk/1/hi/business/7219458.stm [accessed on 7th November 2010].

Prynn,J., (2009), coffee giant pins hopes on boho redesign for branches in capital [online] available at : http://www.thisislondon.co.uk/standard/article-23748711-coffee-giant-pins-hopes-on-boho-redesign-for-branches-in-capital.do [accessed on 12th November 2010]

Wylick, V.,V., (2007), starbucks an example of vertical integration [online] available at : http://www.techiteasy.org/2007/07/28/starbucks-an-example-of-vertical-integration/ [accessed at 22nd November 2010].

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