Critical Analysis of Strategic Issues faced by Starbucks

The aim of this project report is to critically analyse the strategic issues being faced by an organization. The organization chosen for this task is the company Starbucks, which will be analysed using relevant concepts reviewed in the module using appropriate theory and models.

The analysis will include assessment of the external and internal factors and also the competitive forces influencing the company Starbucks. This will be accomplished by the application of PESTEL analysis and the PORTER 5 FORCES model. A combined analysis would be carried out by undertaking a SWOT analysis for the organization.

The report structure would start with a brief introduction to the company Starbucks followed by the strategic issues faced by the firm. The issues are outlined before in the report based on the analysis which has been carried out using the above models. After discussing the current and recent issues facing Starbucks the company analysis would follow which would be supported with relevant theory and application of suitable models. After completing the industry analysis conclusion and recommendations would be provided for Starbucks to counter the strategic problems.

STARBUCKS – AN INTRODUCTION

The Starbucks Company was founded in Seattle in 1971 by Jerry Baldwin, Gordon Bowker and Zev Seigel with a vision to educate American consumers about the fine coffee drinking experience. In 1987 Howard Schultz took over the Starbucks Group, he wanted to create the Italian espresso bar experience in America by creating a personal relationship between the customers and their coffee.

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Just within a couple of years they grew from a small coffee business house to a multi-million dollar player in the industry by buying only the best coffee available and providing the people with an unmatched store experience. As standing, Starbucks is number one in the speciality coffee industry, with more than 12,000 shops in more than 35 countries.

The Starbucks mission statement is “To inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time. ”

Freshly brewed coffee is the main product offered by Starbucks along with other drinks which include cold and hot teas, cakes and pastries. The Starbucks coffee comes in a many varieties each possessing a different taste, aroma and flavour.

In addition to its extensive product offerings, Starbucks has many brands including; Starbucks Hear Music, Tazo Tea, Starbucks Entertainment, , Ethos Water, Torrefazione Italia coffee and Seattle’s Best Coffee. The successful management of all of these brands pulled together constitutes the Starbucks portfolio.

Starbucks is also one of the most globally conscious corporations in the world.  In 2006 Starbucks donated $36.1 million in cash and products, volunteered 383,000 hours in local communities, required growers to use strict environmental guidelines, used 20% renewable energy in stores, and actively recycled in almost 80% of stores in US and Canada. Starbucks has established itself as the coffee leader in the world and has done so on a socially and environmentally conscious platform.

STRATEGIC ISSUES FACING STARBUCKS

The major challenge that Starbucks is dealing with is the current financial crisis in the world economy forcing them to call closures of many stores around the world.

Another challenge that Starbucks is dealing with is competitors. There are numerous coffee shops all over the world and being able to stand out to generate customers is important. Their main competitors are Dunkin Donuts, McDonald’s, and Nestle in the US and brands like Costa Coffee and Caffè Nero in the UK, the two major markets for Starbucks. It is important that for Starbucks to know their competitors and what they are currently doing.

Also Starbuck coffees are priced higher than other market competitors because of Starbucks only purchasing the highest quality coffee beans for their product, thus increasing the price of the drink giving the competitors a cost advantage over Starbucks.

Also Starbucks inadequate marketing strategy on advertising is a hindrance in the business growth opportunities. They prefer to build the brand by promoting the drinks cup-by-cup with customers. The advertisement ends until they drink the coffee, reducing the chances to attract valuable customers.

Starbucks also does not emphasize on distributing their products to supermarket because of being concerned with the quality of the coffee; if the coffees were packaged into plastic bags.

Also the rigorous expansion strategy followed by Starbucks can take a toll on the firms brand image. As corporations grow there can be a tendency to focus too heavily on increasing output and locations, and less focus on quality and brand image. Starbucks needs to stay with its values and ideals that have made it successful.

Also Starbucks policy of not franchising can be a cause of concern for the firm. Franchising would allow the company to open many new stores with less risk, and make considerable profits in doing so. Because of this the firm’s research and development costs would fall making use of the franchisee knowledge of the local market in terms of geographic, , psychographics, demographics, and the local country regulations.

STARBUCKS ANALYSIS

This part of the report would analyse the working of the business by application of PESTEL analysis, Porter 5 forces, the BCG Matrix, SWOT analysis and the Ansoff Matrix.

PESTEL ANALYSIS

POLITICAL

Taxation policy

High taxes levied on farmers in the bean producing countries, would consequently increase the rate at which Starbuck would buy the coffee beans and any such fluctuations in the taxation policy would certainly be passed on to the consumer, who now would have to purchase the end item at a higher price.

International trade regulations and tariffs

Trade issues would affect Starbucks directly when exporting and importing goods. When the government of the trading country imposes a tariff it would not only resulting in an efficiency loss for Starbucks but such large income transfers can also become inconsistent with equity. This extra charge would have to be borne by the consumers.

Government stability

A change in government policies has a direct impact on the taxation and legislation framework. Also the countries in political turmoil or civil war should be considered with great caution when considering probable market ventures.

Employment law

Reduction in the licensing and permit costs in coffee bean producing countries would consequently lower production costs for the farmers and any such saving would subsequently pass on to Starbucks when purchasing the raw materials and finally to the customers.

ECONOMIC

Interest rates

High interest rates would mean putting off the investment and expansion plans of Starbucks, which would result in fewer earnings for the firm. Low interest rates should have the opposite effect.

Economic Growth

In periods of negative growth, the consumer incomes would fall leaving less disposable income thus impacting sales for Starbucks.

Inflation rates

Business costs will rise in times of inflation which would ultimately have to be borne by the consumer.

Competitors pricing

Competitive pricing from competitors would impact Starbucks pricing that would drive down the profit margin as they try to maintain their market share.

Exchange rates

If the currency value falls in a bean supplying country, Starbucks would get more for the same price, when importing the goods. This saving would be passed to the end consumer.

SOCIAL

Population demographics

Identification of the target population at which Starbuck needs to aim their products is a significant factor in the business operations. The marketing campaign undertaken would focus accordingly.

Coffee is a luxury product in some ways, so the people with the most amount of disposable income should be targeted.

Working Population

A large number of workers in big cities now go out for lunch and meals. Starbucks can cash this to their advantage and promote the shop as a place where people can meet and eat, boosting the sales.

Location

A good location which is easily accessible is vital to ensure that the customers visit the shop.

TECHNOLOGICAL

IT development

Starbucks launched its first-generation e-commerce website in 1998. As a result, scalability and performance have improved, and the company now has the tools it needs to profile and target customers, analyse site data, and deliver new features to the market in the shortest time possible.

New materials and processes

Technology developments in coffee making machines and the computer systems that Starbucks use to operate their cash registers would enable the staff to work swiftly and efficiently. This results in customers being served quickly thus creating potential for serving more people in the day.

Rate of technological change

Technology is advancing at an astounding rate. Starbucks will need to invest majorly just to stand their ground in the always expanding and developing market, and also to try to stay ahead of competitors.

ENVIRONMENTAL

Pollution problems

Starbucks customers create a lot of waste by disposing off the cup and the contents incorrectly. The material for the cup should be carefully selected to make it as biologically degradable as possible.

Planning permissions

Planning permission may not be granted to Starbucks if the construction would harm the environment. The land may be protected.

Work disposal

There are strict laws in most countries pertaining to waste disposal and non-adherence to these could lead to Starbucks being sanctioned, which would affects them financially and also tarnish the reputation of the brand name.

Environmental pressure groups

Starbucks should be aware of the influential and physical power of groups such as Friends of the Earth and Greenpeace. Any violation of animal or environmental rights by a company is usually followed by a swift and attention-drawing protest from one of the groups. Brand image and customer bases are often irreconcilably tarnished due to the actions of these groups.

LEGAL

Trade and product restrictions

Starbucks need to follow the trade laws of the countries where they have established businesses. They must ensure that they are not in violation of any local laws. Certain countries impose a tariff that has to be paid accordingly when importing or exporting goods and this must be taken into account as well.

Employment laws

Each country has different employment laws, like limiting the number of hours a person can work per week, varying levels of minimum wage etc. Starbucks should be aware of such factors when considering business expansion.

Health and Safety regulations

By not maintaining high standards they would be liable for damages if found in violation as it is a legal requirement for them to enable that their staff and customers are safe when they are in their stores.

Land use

Starbucks have to abide by the laws of the building authorities when constructing shops or altering purchased sites and if found in violation of land rules, it can be panalised by the local authorities.

PORTER 5 FORCES ANALYSIS

1. COMPETITIVE RIVALRY

Starbucks is the leader in retailing and roasting of specialty coffee in the world. Major competitors include Costa coffee, Caffé Nero, Seattle’s Best Coffee and secondary coffee providers such as McDonald’s, Burger King and Dunkin Donuts. The competition is nowhere near to Starbucks volume of operations and sales.

Consumption of coffee is not dependent on the price of the product but also on the differentiation between each product and several value adding variables such as the quality of customer services, brand, brand recognition and image of the company. Hence, Starbucks is not majorly sensitive to movements of other firms in this segment.

2. THREAT OF NEW ENTRANTS

Starbuck is the world leader in its industry and has controlled access to distribution channels. Starbucks have extreme control over such distribution channels because of setting strict guidelines for the suppliers to follow. Starbucks is also constantly innovating and showing strong product differentiation to hamper the possibility of new entrants.

However, the entry barrier for the industry is relatively low and any big firm where capital is not a problem could be a potential entrant. Some of the more current and on-going threats of new entrants include fast food chains such as McDonalds, Burger King and Dunkin Donuts which can become a major problem in the near future.

3. BARGAINING POWER OF BUYERS

A big threat to Starbucks is the absence of switching costs in the speciality coffee industry, customers face no switching costs in switching from Starbucks to Costa Coffee or Caffé Nero for a cup of coffee. Also a threat to Starbucks is the ability of customers to brew their own coffee. Starbucks tries to counter this threat by offering the Preferred Office Coffee Providers and also provides directions for making the perfect cup of Starbucks coffee at home, the perfect cup of course includes all ingredients which have to be purchased from Starbucks.

Also with new entrants and competitors such as McDonalds who claim to offer premium roast coffee of reasonable quality for lower price, thus giving the customers some bargaining power.

4. BARGAINING POWER OF SUPPLIERS

Coffee is the second largest traded commodity in the world. Central and South America produce majority of coffee traded. Starbucks depends upon both outside brokers and a mutually direct contact with exporters for supply of premium coffee beans.

The quality of coffee beans sought by Starbucks is very high, proving to be a potential threat to the company. Only suppliers which meet Starbucks coffee standards are able to supply to the giant company. The supplying industry only has few firms which can deliver the quality giving them considerable bargaining powers.

However, Starbucks counters this due to its massive size and being the primary buyer and also because of the importance of Starbucks business to any individual supplier as it would account for a large percentage of the total supplier’s sales, thus reducing the bargaining power of suppliers.

5. THE THREAT OF SUBSTITUTION

Substitute products are the products that can pose as a trade-off for the product being offered by a company. In the speciality coffee industry, substitute products can be soft drinks, tea, energy drinks, fruit juices and other caffeinated drinks.

Here innovation would play a huge role. To counter this Starbucks have given their menus a complete revamp and have differentiated so many of their products which are now part of the main product line. The menu includes various teas, hot and cold coffee, baked goods and various confectionery items.

The only true direct substitute for speciality coffee would be the basic coffee, which is of lower quality than speciality and as such does not present any threat.

Market Penetration:

Hotels, Grocery Stores, Businesses, Schools, Airlines and Industries Cafeteria

Product Development:

New Bold Fresh Lunch Programmes and Salads e.g. fiesta chicken salad, fruit and cheese platter

New Market

Market Development:

Opening of stores all over the world. Expansion strategies into Brazil, Russia, Romania and India.

Diversification:

Music CD’s, Clothing, Coffee Mugs and other accessories.

SWOT ANALYSIS

Alternate SWOT analysis of Starbucks available here.

STRENGTHS

• Strong brand name
• Large retail distribution system
• Quality product
• Extensive product list
• Good supplier relationships
• Massive capital funding
• Valued and motivated employees

WEAKNESSES

• Dependence on single source of business/income
• Prices relatively higher than competitors
• Strong dependence on suppliers
• Merchandise sales in stores
• Over reliance on home market
• Aggressive expansion leading to failure

OPPORTUNITIES

• Overseas business expansion
• Business expansion into untapped U.S. markets
• Extension of brand name to new products and business lines
• Product range diversification to more food items

THREATS

• Strong competitors with massive capital funding capabilities like McDonald’s and Dunkin Donuts
• Economic conditions may make consumers unwilling to pay higher prices
• Political conditions overseas may limit business expansion
• U.S. speciality coffee industry approaching saturation

RECCOMENDATIONS AND CONCLUSION

Starbucks has to effectively pursue a Focus-Based Strategy in conjunction with differentiation and a cost leadership based strategy. Being a lower cost store will increase the difference between Starbucks and provide it with a competitive edge. At present, Starbucks competitors are attempting to specialize in the coffee business, therefore Starbucks must pursue focus strategy to increase its strength.

Starbucks must reduce their product price by producing a new product of coffee using cheaper beans or can come out with special discounts and promotions to reduce cost, thus increasing sales enabling Starbucks to enter new low cost markets and increase profitability. Also needs to focus on building alliances in new markets/countries to reduce management focus and benefit from the local and experience curves.

Should focus on advertising the brand through internet services for users to access, do road shows, hand out brochures etc. so that consumers become more aware of the brand’s strong international presence and brand name. Market penetration and market development will help increase the sales. Access unexplored distribution channels like making available packaged Starbucks coffee for consumers by displaying it nationwide in various convenience and shopping stores and not only Starbucks stores.

Starbucks must adopt twin policies of Product Development and Product-Market Diversification to counter the stiff competition in international markets. It is important to understand this in the product development phase as they would need to focus solely on making their existing products better. The company can demonstrate product and market diversification through research and development coupled with creativity and innovation. Product differentiation has proven an excellent defence against threats such as bargaining power of buyers. Developing new products will offset such potential risks.

A strategy should be formulated to tackle the competition by entering into agreements, long-term contracts, with the food service companies that they are competing against. This way their coffee would be sold at these outlets and they would gain access to new markets and increase sales while decreasing competition.

Starbucks should continue to be a first mover into markets with new products and ideas. Being a first mover of new products into new international markets will be an excellent way for Starbucks to build customer loyalty and uphold its image as an innovative company.

Starbucks should continue to locate their operations in high traffic areas, high visibility areas. The company should continue to take excellent care in picking locations. It is extremely important that Starbucks’ international stores reflect uniqueness in their location and layout. Having locations in a variety of locations will ensure large market exposure.