Aims and Objectives
Starbucks is an ever growing business organization. Since its inception in 1971 it has laid success stories of business (Herve, 2004). On the one hand it expanded its operations globally and on the other has portrayed the sustainability of business in the time of severe recessions and declining economy. Starbuck is a success story, and it tells the managers how to manage and expand the business. The aim and objective of this report is to analyze the corporate and business strategy of Starbucks and conclude for future managers and business how to be successful in dynamic environment. The other aim of this report is to have a look on current strategies of Starbucks with respect to theoretical background of adopted strategy (corporate and Business) and come up with implications of future for Starbucks.
Purpose of Report
The main purpose of this report is to gain an insight in the importance of strategic management for any business and in this particular case "Starbucks". The other purpose is to identify how strategic management and proactive strategic choice and analysis help Starbucks to become an international brand. In this report, the report will examine the future of coffee industry in the today's world when people are facing inflation and declining economies all over the world. How the coffee industry and in this report Starbucks in particular, will sustain in today's environment of business?
The report will also examine how companies can expand themselves from local operations to international operations. What strategies those companies follow which operate globally? The main reason for doing this analysis is to find out the revival of Starbucks, after its decline from 2006 to 2008, when the Starbucks has announced closure of 300 stores and cutting of 6700 jobs (BBC, 2009). In the year 2011, the Starbucks announced 500 of free shares to its employees in UK, although weather was bad in the previous quarter of operation. But it's the strength of Starbucks that helped the company to mange this kind of extra favor to its employees (Clarke, 2010).
The report will also analyze the structure of business which Starbucks is currently adopting and currently operative strategies of Starbucks. The report by analyzing the strategic implications of Starbucks will present a guideline to new companies about their survival and expansion both locally and internationally. The business model of Starbucks is an example for managers and researcher to find the strengths behind successful local and international operations. Back ground history and Core Competence It was in 1971 when an English teacher, a history teacher and a writer, named Jerry Baldwin, Zev Siegel and Gordon Bowker respectively opened a shop "Starbucks Coffee, Tea and Spice" in Seattle, WA (George, 2007).
It was at that time when three people invested 1350 US dollars each and borrowed a loan of 5000 US dollar from bank to start first Starbucks Store. The initial motive behind the store was a mission to provide exclusive experience of coffee and tea with extra quality. The concept of ambience which is still working behind every Starbucks store is given by the cofounders. The cofounders at the start deepened their knowledge of coffee and concentrated on the extraordinary experience of customers visiting their store. The initial success of Starbucks was because of cofounder's insight into the coffee business and perfect location of stores in Seattle.
Schultz was ambitious in expansion of stores, as by visiting several other coffee stores in the town he realized that any store can learn the art of good coffee making and the survival of Starbucks lies in expansion (George, 2007). So here we can point that. Initial strategy of Starbuck was expansion. In the September 1982 Starbucks stores were opened all across the country. The Starbucks success is deeply rooted in Schultz philosophy of expansion and developing a culture of Starbucks embedded in trust and loyalty. He was planting Starbucks Corporation with in depth knowledge of coffee industry, with quality service to customers, trust in employees and planning a vision for future.
Schultz since the beginning in 1971 was ambitious to make Starbucks a place, where customers are not meant for a cup of coffee instead the customers should feel Starbucks a place like their home. His idea was incorporated in 1983 when he introduced fresh brewed coffee, espresso and cappuccino (George, 2007).
Expanding the vision and building the concept
The major change in the history of Starbucks came in August 1987 when Baldwin and Bowker decided to sell Starbucks with its trade name and all the assets. Schultz acquired Starbucks with the help of investment from Giornale Investor and became the president and CEO of Starbucks Corporation. From here the journey of Starbucks Corporation started as a nationwide chain of coffee stores (George, 2007). At this crucial moment Shultz was fully aware of importance of employee trust and loyalty towards the company (Herve, 2004).
Shultz not only focused on the quality and satisfaction of customers but also emphasized the involvement of employees in decision making, so that he can get best out of them. Shultz was well aware of the fact that key success factor for Starbucks corporation to expand is in mutual coordination, respect and trust between management and employees. In order to conclude we can say that, Starbucks since its start focused on knowledge of coffee making and devoted its efforts in providing the customers with valuable experience of visiting Starbucks. On the other hand Starbucks focused on expansion of coffee stores throughout the country and their core competence was providing customers with a home experience away from home.
Core competence of Starbucks Corporation is in depth knowledge of coffee making in particular and coffee industry in general. The company made it different from other coffee stores by providing customers coffee without any addition of chemicals.
Mission statement/Key Stakeholders
In 1990 the management of Starbucks realized the importance of mission statement and realized that it can serve as a tool for communication with stakeholders (employees, customers, investors). The mission review system was introduced to make it sure that Starbucks is aligned with the mission statement. Our mission: "To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time". The mission of Starbucks revolves around six principles; establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow (Starbucks, 2011).
The following six principles will help us in developing our understanding of the mission of Starbucks, Providing an environment of work where there is a trust and respect among the employees Incorporation of diversity as a core business activity Applying the highest standards of quality in purchasing, roasting and delivering our coffee Developing enthusiasism among the customers all the time Positive contribution to the communities and environment we are working in Recognizing profitability as an essential component of growth in the future The industry and the competitors The coffee is a choice of millions of people all around the world; consumers come to coffee shops daily from morning to evening. The sales of coffee have risen up to 50 percent in the year 2007(Burritt, 2007).
That is the main reason more and more organizations are moving to coffee business, examples of McCafe from Macdonald's and Dunkin Donuts Coffee from Dunkin Donuts are the recent addition to competition in international coffee business. In this report McCafe and Dunkin Donuts coffee will be examined as the major competitor of Starbucks. By examining the driving forces of coffee industry we can come to a conclusion why business model of Starbucks is an example for new companies. The prices for coffee beans has increased from 108.39 U.S. cents per Ib. in 2009 to 184.26 U.S cents per Ib. in 2010("International Coffee Organization Prices," 2010).
This 200% increase in the price of coffee beans in the last two years has disturbed the whole industry forcing to leave many small players and declining the profits of other players. Because of this increase in price of coffee beans and overall economic condition of world the Starbucks also has to increase the prices especially in china and the United States (Baertlein, 2011). Besides increase in coffee prices all over the world, the coffee industry can still survive because of high demand and strong consumer base. The coffee industry will continue to grow till 2015 or even more in the emerging economies of the world (Lingle, 2007).
As it has demand and very strong consumer base. For overall industry position there are no issues for Starbucks as they have emerging markets in the form of Brazil, China and India. As Brazil is progressing economically and it has been estimated that in near future Brazil will become the larger coffee consumer country with its recent coffee consumption of 39% (Murphy, 2011). The Starbucks is already in China and planning to buy coffee from India as well as opening Starbucks in India (Bose, 2011).
The coffee industry is growing at a pace and survival of coffee operators in the industry depends on expansion of company that will provide the company with market leadership among its competitors (Bose, 2011). The major competitors of Starbucks are McCafe of Macdonald's and Dunkin Donuts Coffee. McCafe is currently operating the strategy of low cost leadership (Burritt, 2007). While on the other hand, Dunkin Donuts is operating at low cost differentiation strategy where customer can choose a coffee from menu (Dicarlo, 2004).
The strength of Starbucks is in its wide range of coffee with high quality. In order to compete the mounting pressure from competitors Starbucks introduced Wi-Fi, Starbucks digital network from where customers can access Wall Street Journal and iTunes, the Starbucks introduced these services free of cost for its customers while normally these services are paid (Miller, 2010). The differentiation strategy of Starbucks is providing the Starbucks with a glorified image among the customers. That is the only way Starbucks can save and improve its image in the close competition with McDonald's and Dunkin Donuts.
Analysis of Strategy
Porter Five forces Model
In order to have a closer insight into the coffee industry we can use Porter Five forces model (Thompson, Strickland, & Gamble, 2007). The major threat which coffee industry is facing till today is the rise in prices of coffee at the end of suppliers. In the year 2010 the price of most sold brand of coffee the Arabica raised to 77% and created problems for all the players in the industry (Murphy, 2011).The other biggest threat is the competition among large and small specialists of coffee makers.
The three big operators, i.e. Starbucks, McDonald's and Dunkin Donuts and many smaller coffee chains are competing for their share in the industry. The leadership of Starbucks in the industry is continuously threatened by MacDonald's which is competing with Starbucks head to head especially in Europe (Liu, 2009). The third biggest threat is the power of buyers. With expansion of every competitor, consumers have a choice to go anywhere and can switch at any time. This power of buyers is forcing the operators to market extensively and follows a low cost and consistent strategy (Han, 2009).
The entry barriers in the coffee industry are quite soft and potential of new entrants is very high, that is the fourth biggest threat. The threat of substitutes in the coffee industry is quite weak as consumers like coffee because of its taste and taste cannot be substituted. The calories which coffee provides to consumers can be replaced but its taste cannot be replaced. From the Porter's five forces we can say that the potential of growth and profit is still high in the industry. The growth rate for the coffee industry is increasing and it has strong potential for competition and attractiveness (Lingle, 2007).
Starbucks Strategic position and Choice
In this section we will examine the strategies of Starbucks by applying SWAT, SWOT, PESTL and Value chain Analysis. An analysis of Starbucks strengths, weakness opportunities and threats will be helpful in analyzing its strategic choice. The Starbucks has differentiation strategy at the corporate and business level. Its high quality differentiation strategy has made it possible for the company to provide better services to customers and helped the company to have a competitive edge over the rivals. The introduction of wireless internet and Starbucks digital network has improved the sales of company and also provided the customers with valuable experience. In the year 2010, the Starbucks introduction of wireless internet and Starbucks digital network in the stores lead to an increase in the sales of company increased by 4% after a decline in the previous year (Miller, 2010).
The Starbucks digital network has become an important strategic asset for the company as it is providing the company with customer satisfaction and loyalty. These two aspects are important keeping in view the stiff competition. The Starbucks decision to enter in India is another strong strategic move by Starbucks. India is a growing economy where Starbucks can provide its citizens with a new experience of coffee (Bose, 2011). India can be a source of growth for Starbucks in the near future as India is becoming more and more industrialized and its citizens have a tendency to switch to new styles of living where coffee can be a source of new tradition. The other country where Starbucks can expand is China. With a growth in coffee sales by 9% the china can be a source for competition for Starbucks where it can take head on with Macdonald's (Burkitt, 2010).
The stock prices of Starbucks went down in the economic crisis of 2009-2009 ("SBUX Basic Chart |Starbucks Corporation Stock - Yahoo! Finance," 2011). Although the stock prices of the company were leaning but its profits never went down. The company profits went up from 7.8 billion U.S dollars in 2006 to 10.7 billion in 2011(Starbucks Corporation, 2010).The economic crisis forced many companies to shut down but Starbucks continued to move forward with increase in profit every year. The Starbucks continued to expand itself in the last five years when it had 12,440 stores worldwide in 2006 and 16,858 in 2011(Starbucks Corporation, 2010).
The Starbucks realizes that survival and market leadership lies in expansion of business globally to create a larger market which can face any environmental change. SWOT Analysis: The strategic position and choice of Starbucks can also be examined by SWOT analysis. The major strength of Starbucks is its number of stores worldwide with 16,858 stores in the year 2011(Starbucks Corporation, 2010). The second major strength of Starbucks is both domestic and international growth which provided Starbucks an advantage in the economic crisis when its stocks prices went down but it captured a hit in its profits (Starbucks Corporation, 2010).
The third major strength of Starbucks is its brand recognition, where customers come to Starbucks and have a valuable experience. This strength will provide Starbucks an advantage over its competitors in the coming years. Besides these strengths one of the major weaknesses of Starbucks is its higher price of coffee and specialist coffee beverages. This weakness is hurting Starbucks, when Macdonald's uses lower price in its marketing against Starbucks. The second major weakness of Starbucks is its dependence on coffee for profits, where 75% of Starbucks revenues are generated from coffee and coffee based products (Starbucks Corporation, 2010).
The rise in coffee beans price is more dangerous for Starbucks as compared to its major rivals Macdonald's and Dunkin Donuts who focus food first and then coffee. The opportunities which Starbucks have in front are expansion of its operations in growing economies like Brazil, China, India and Russia. In the near future Brazil, India and China can be a source of competitive advantage for Starbucks with their growing economies and industrialization (Burkitt, 2010, Murphy, 2011, Bose, 2011).
The agreement between Starbucks and Tata Coffee of India which is the fifth largest coffee exporter will open new horizons for Starbucks as it can access China and Russia with cheaper cost (Bose, 2011). The threat which Starbucks is facing is opening of McCafe by Macdonald's in its franchises worldwide. This head on competition from Macdonald's is alarming for Starbucks especially in Europe. In Europe to start a new store a company needs more than $350,000, while in Europe Macdonald's needs only one third of that, because of its prior presence in the form of Macdonald's franchise (Liu, 2009).
The Political/Legal, Economic, Social, Technological factors analysis (PESTEL) is an important tool for designing and implementing strategy.
The economic conditions are important for every company because these conditions direct the future of company. The Starbucks faced financial crisis in 2009-2009 because of recession and it resulted in reduction of its stock prices ("SBUX Basic Chart |Starbucks Corporation Stock - Yahoo! Finance," 2011).
The advancement in technology is also important. The introduction of WIFI internet and Starbucks digital network to retain and attract customers has made it possible to increase its revenues( Miller, 2010). The introduction of Starbucks card has provided the customers with quicker service and more visits to Starbucks (Starbucks Corporation, 2011).
The overall political situation of the world, the existing tension between United States and the rest of world in particular Muslim world has affected Starbucks performance. In the year 2002 Arab students called for a boycott of American companies and in the boycotted companies Starbucks was also included. This boycott affected the profits of Starbucks in Arab world significantly (Robert Fisk, 2002).
Starbucks is fully committed to social and cultural environment in which it is working. The Starbucks has adopted an environmental friendly objective where the aim of company is to serve the society at large (Starbucks Corporation, 2011).
Value Chain Analysis
Human Resource Management
Starbucks has its employees at the centre of all its activities. The Starbucks has empowered its employees and developed a corporate culture beyond the normal standards. This valuation and dependence of Starbucks on its employees for all the core activities has provided Starbucks with a unique competitive advantage. The corporate decision of Starbucks to empower its employees and award them free stocks has improved employees commitment and better services to customers (Zoe, 2011).
Traditionally the marketing expenditures of Starbucks are quite lower as compared to other companies. But the mounting competition has pushed Starbucks to advertise to enhance its consumer base. In the year 2005, Starbucks has spent $87.7 million on advertising (Starbucks, 2011) and is continuously enhancing its marketing budget. Starbucks adopts a new marketing strategy where employees serve a communicator of brand (Gulati, 2008)
Starbucks has created an image of high quality brand among its consumers; it provides value to its customers. The extraordinary services which Starbucks provides to its customers are the difference between Starbucks and its competitors. Almost 85% of Starbucks' business revenue comes from its retail operations and it is crucial for Starbucks to keep on providing valuable services to its customers (Starbucks, 2011). The recent addition of Wi-Fi internet and Starbucks digital network where customers can access free of cost services of Wall Street Journal, iTunes, has increased sales of Starbucks.
From the above strategic analysis of Starbucks, we can say Starbucks is working in growing industry and it is the leader of industry. Starbucks is quite proactive about its future, its decision of purchasing coffee from China and India will help in controlling the costs and maintaining its strategy of differentiation. Besides differentiation strategy Starbucks has transitional strategy that is helping it to grow internationally. Because of Starbucks ability to adopt local culture in different countries, we can say the business model of Starbucks can be adopted by any international business. The core competence of Starbucks is its corporate knowledge where people always are eager to gain knowledge about the industry. Starbucks is a global company and from its strategic analysis we can say Starbucks has no immediate threat of decline in its performance.
Although Starbucks has expanded itself internationally, but most of its stores are domestic and it has only 30% presence internationally ("Starbucks Coffee Company- Investor Relations- Financial Highlights," 2009). The strategic recommendations for Starbucks are international expansion to ensure its growth and sustainability. There are 5,727 stores Starbucks has internationally while it has 11,131 stores in the United States (Starbucks Corporation, 2010).
In order to gain more consumer base and ensure sustainability in the long run Starbucks has to expand globally. The Starbucks can open new stores internationally in the countries where it has a presence already in order to enhance its profits beyond the United States ("Starbucks Coffee Company- Investor Relations- Financial Highlights,"2009).
While expanding internationally Starbucks has to adopt the local culture and tradition, as incorporating local culture and traditions can greatly affect the profits (Bartlett, Ghoshal, & Beamish, 2008).So there is a need for research and understanding while moving to new cultures. Another reason for expanding the international operations is growing economies of India, China, Russia and Brazil, as these countries have the potential of buying and incorporating coffee in their culture.