STRATEGIC MANAGEMENT ANALYSIS: STARBUCKS. D&M Consultancy Services 07/13

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1 STRATEGIC MANAGEMENT ANALYSIS: STARBUCKS D&M Consultancy Services 07/13

2 Table of Contents Introduction:... 2 TASK A: Market Environment Analysis VIRN model: Value chain analysis SWOT analysis: Starbucks Environmental Analysis: Porter s Five Forces: PESTEL analysis of Starbucks: TASK B: Starbucks Strategic Analysis Internal environment analysis: Structure: Threshold: Unique resources: Core capabilities TASK C: Starbucks Fit Analysis Recommendations: References: P a g e

3 Introduction: Starbucks came into existence when Jerry Baldwin, Zev Siegl and Gordon Bowker ventured into the retail coffee shop selling freshly roasted coffee in the US. It started with a single store in Seattle and currently has over 18,000 in 60 countries. The coffee market in the UK in particular is very competitive and expected GDP growth of 5.5% in 2014 is a silver lining. Turnover from the overall coffee outlets has grown from 1 billion dollars to 1.3 billion dollars and forecasted to 2.5 billion dollars in It clearly indicates there is a lot that can happen over coffee and Starbucks can re-strategise for UK. TASK A: 1.1 Market Environment Analysis The market environment analysis is important for understanding what all the company should do in order to consolidate its position in different countries VIRN model: The micro environment can be analysed using VIRN model. The acronym stands for: Value (V): Starbucks provides value by roasting exclusive gourmet freshly ground coffee, which is a unique customer value and best in world class standards (Larson, 2008). 2 P a g e

4 Inimitable (I): The taste which is blended by grinding fresh coffee beans is the key to Starbucks success which attracts customers. Rare (R): Starbucks chooses the rarest rich full bodied coffee beans from one location for all its coffee stores worldwide (Bell, 2009). This consistency in flavour and taste makes it rare choice. Non substitute (N): The coffee taste is unique and it is non-substitutable which is hard to find Value chain analysis Inbound logistics: Starbucks outsources its coffee beans from Africa; sugar processed from natural sugarcane is delivered globally across countries. These two critical components for preparing coffee forms 80% of its inbound logistics, which is checked and rated for bean quality. It also created a long term relationship with suppliers for a sustainable wealth creation. GlobalData (2010) mentioned that it is crucial for the 3 P a g e

5 business as Starbucks outsource 30 different types of coffee which is closely linked to the menu it offers to all the coffee connoisseurs. Outbound logistics: The outbound logistics for Starbucks is selling coffee and snacks through its retail stores across nations. Marketing and Sales: Starbucks does not spend on marketing and sales per se, as the sales volume achieved is through brand image and brand name built over a period of time. Clark (2007) opined that the online presence has been well received and it tracks the Facebook and Twitter comments. All the official announcements are done by Starbucks press release from the HQ based in the US. There is country specific marketing and sales strategy as each country has different business processes which are legally linked. 4 P a g e

6 Service: Starbucks customer service in the retail coffee shop is legendary, as its employees are the pillars of the brand Starbucks which differentiates itself from other coffee brands (Brian, 2010). Support activities in Value chain: Infrastructure: It spends a lot of time in researching for setting up a particular coffee shop in a location of its choice in a country. The infrastructure of its functionalities helps to support the value chain components. The standards of operation in its process are replicated throughout the retail coffee chain that helps in delivering uniformity in what they do. Human Resource management: The HRM function in Starbucks aligns the recruitment process as per business requirements. It trains new recruits to upgrade them with Starbucks culture and service delivery specifics. Compensation in Starbucks is performance linked which tries to motivate them through tangible and intangible incentive plans (Drejer, 2009). Talent acquisition and retention is critical for the Starbucks success story as coffee making skills can be replicated if employee leaves. So exit interviews are mandatory to know the reason of leaving Starbucks. Technology: The technology used in Starbucks is coffee roasting machine grinding machine which is programmable to ensure the true consistency in coffee taste and aroma. Technology in billing and training are also part of the everyday transactions. Use of Facebook in its internet presence will help to connect faster to a specific type of 5 P a g e

7 coffee lover. Thus, Starbucks is leveraging to bond with customers faster, making it a brand in new markets. Technology is being used to track customer taste preferences, payment history, profit from one customer and more (Moore, 2011). This helps them to throw in discounts at the store in order to attract new customers and compel existing customers for a second visit. Chips in the loyalty card are used to store data. Information regarding the transaction is automatically transferred in the chip, once the loyalty card is swiped for an order SWOT analysis: Starbucks Strength (S): Starbucks brand name is linked to its coffee blends and aroma which is distinct in its style. Its customer loyalty card, used for repeat visits by the customer into its retail outlets saves time, money in every transaction it is used. This is delivering customer value which leads to higher sales volume and quicker break even (Rushe, 2011). Profit reinvested from the operations leads to global expansion and steady earnings. Starbucks is ahead in financial strength and profitability. 6 P a g e Strengths List the positive Characteristic of the library. List opportunities for SWOT Weaknesses List the negative Characteristic of the library

8 Weakness (W): The US market is comprised of segments where stagnation has set in. This is leading to low sales, as the customers taste and preference has changed (Brian, 2010). This loss making units are making dents in profits and Starbucks has the risk of losing its thin customer base to its competitors. Product pricing is expensive; customer can easily switch to other brands. High calories and fat are health implication of coffee consumption which can affect the market. Starbucks should able to counter by strategising at a tactical and operational level to overcome the impending problems (Motley, 2009). Opportunities (O): The global market holds great potential for Starbucks growth. Growth potential in emerging world market BRICS (Brazil, Russia, India, China and South Africa) is tremendous. Amidst global economic meltdown, these measures can make the balance sheet look enviously for Quick expansion through strategic alliance for entry into new market will eliminate the time lost in penetrating the market. Thus, Starbucks can concentrate on building a steady consumer base in new markets and gain first mover advantage. Rushe (2011) added to state that acquisitions of Evolution Fresh and La Boulangerie in juice, energy drinks are smart moves by 7 P a g e

9 Starbucks. This is a critical segment to venture in as consumers are moving away from aerated drinks to healthier ones. Threat (T): The company is poised to receive a variety of competitors with different pricing in the coffee drinking industry. Costa coffees, caribou coffee, McCabe of McDonalds chain, Dunkin, Panera are expanding their coffee retail chain throughout the world. The coffee taste and preparation procedure is generic easily duplicable. The economic crisis is a threat where consumer losing jobs will show austerity in spending and even drinking coffee. Market audits done frequently to understand the needs of the market and studying what competitors offer should be on priority for Starbucks. Competition will be there, but Starbucks need to use its brand image and mix its marketing and advertising to deliver lasting impression in the mind of customers (Motley, 2009). Differentiation will be the key in service, when the product tastes almost the same in a fiercely competitive market. 2.0 Environmental Analysis: Porter s Five Forces: The use of Porter five forces will help to understand environmental forces which are reacting on the Starbucks brand. Threat of substitutes: The category of drinks like soda, aerated drinks, beer, juice, non alcoholic drinks are the nearest substitutes in the category of (products) while substitutes for (environment/ambience) is the place to drink coffee which can be a 8 P a g e

10 lounge, Bristo, fast food restaurants, salad bar. This will be a challenge if the customer switch to a different drink type and place to sip in. Threat of new entry: The entry barrier into the coffee drinking market is relatively low as easy to prepare method makes the drink more susceptible to competition. All the big names Mc Café, KFC, Burger King, and Subway can start beverages as additional item in menu apart from the food items. Competition rivalry: Starbucks faces intense competition from Costa Coffee, Mc Café, Java Centrale, Caribou Coffee at select locations around the world. Tea as an energy and antioxidant drink also tends to intensify the competition in the beverages market (Motley, 2009). Threat of New Entrants Bargaining power of suppliers Competitive rivalry within the industry Bargaining power of customers Threat of Substitutes 9 P a g e

11 Bargaining power of the suppliers: Coffee bean produced in Africa is negotiated at the best price by Starbucks as volumes negotiated are huge. The suppliers of cups have poor bargaining power as Starbucks strategy to install automated machines in big corporate houses was aimed to push volumes. Bargaining power of buyers: The bargaining power of buyers rests on consumers. Low level of competition during early part of last century was an opportunity for Starbucks in US, but stagnation led to global expansion plans for Starbucks (GlobalData, 2010). It therefore had to standardise its offerings for each nation, keep the brand promise to lure the buyers. Superior quality, warm service and a Starbucks card, gave the customers something to relate with and they kept coming back for more. 3.0 PESTEL analysis of Starbucks: Political: The aspect of heavy tax on farmers producing agri-produce is a dampener as the cost of outsourcing coffee of rich variety is substantially less. This was against the sustainability agenda to support local farm produce of UK origin. Economic: Larson (2008) stated that international trade regulations and currency exchange rate affect the outsourcing of coffee beans from Africa. The consumer spending rate has fallen due to negative economic growth and less disposable income. 10 P a g e

12 Thus the cautious spending is affecting the sales volume of Starbucks. Global markets are therefore an opportunity to encash Starbucks brand name. Social: The income level of the particular geographical area is of importance which determines the ability to spend. Moore (2011) concluded that the Starbucks strategy to position the coffee shop at a strategic location is important for garnering higher sales. This is a counter strategy to increase sales against the gloomy economy. Technology: The newer coffee brewing machines are used which are using less of energy, which are reducing the turnaround time to prepare the coffee with respect the order. Software upgrade for aligning its internal functions, order processing, billing was done to improve stakeholder satisfaction (Rushe, 2011). It uses information technology to link websites with social networking site to lure its coffee admirers. Environment: The maximum amount of coffee is grown in Africa and an effort to do sustainable agriculture is on the top of the agenda for Starbucks. It is choosy in preparing a particular coffee taste and engages in research so as to minimise the environmental pollution and energy usage. All its cups and packages of coffee varieties have recycle icon to make the customer aware about caring for the environment (Bell, 2009). Legal: Health issues for drinking coffee is a debatable topic as Starbucks faces two challenges. The coffee produced at a retail store needs to meet health and hygiene 11 P a g e

13 standards while preparing it, while consuming coffee is a health hazard as per some medical journals. TASK B: Starbucks Strategic Analysis The strategic analysis would help us to understand the internal condition of Starbucks and the organisational structure which leads to success in achieving its business goals. 2.0 Internal environment analysis: The Starbucks internal structure is cohesive where management and its employees are trained in a world class training programme that sets apart in terms of brand offering. The knowledge of coffee production, procedures of the retail chain, inbound and outbound processes, customer service and loyalty are ingrained in the employees (Larson, 2008). A culture inside Starbucks is infectious which motivates employees as self driven individuals striving with excellence to contribute towards organisational goals. 2.1 Structure: The matrix structure for the retail SBU (strategic business unit) combines supply chain (inbound), links finance to pay the vendors, billing at POS (point of sales) generates revenues and links customer satisfaction level. All employees are multi skilled but are assigned to one particular task primarily but needs to support other secondary functions as well. The team who prepares and the team serving are cohesive and are driven by IT. Real time sharing of information helps Starbucks to understand the metrics of 12 P a g e

14 demand and supply (Brian, 2010). This together with forecasting of the past data helps to understand the minimum amount of inventory, human resources required. The corporate structure at managerial level is different and is hierarchical. The matrix suits the tactical level where multi skilled operations are required to influence the outcomes in a favourable manner. 2.2 Threshold: The store operations are linked to the inventory level of variety of coffee. Motley (2009) stated that this is critical to customer satisfaction as unavailability will increase the dissatisfaction and losing the opportunity to make a sale in the retail store. It stocks more than 30 blends of coffee of different types. It blends its core ingredient coffee with crème, caramel, chocolate, liqueur, hazel nut etc to bring flavour to differentiate the taste. It usually stocks its coffee and ingredients with a buffer of a fortnight but the bigger and busier ones store it for a month s supply (GlobalData, 2010). This ensures moderate cash reserves, for that particular Starbucks SBU, which is responsible for its profit and loss statement. Forecasting of consumption patterns of last year gives an idea for that retail store how much to outsource the ingredients. Leveraging information in the database will lead to better understanding of service capacity and defining the store level threshold. The monthly break even for each store is essential for understanding the revenue generation model for each SBU. 13 P a g e

15 2.3 Unique resources: Rushe (2011) stated that the employees are the assets of Starbucks and they are the ones who can differentiate the offering to the customer. The ability to link the customer wants and desires is a challenge, as the coffee needs to retain the exact taste to satisfy the loyalty factor. Consistency in taste is customer derived quality which Starbucks has been able to master (Motley, 2009). It is the art of blending coffee beans to bring out each time the unique flavour and taste which defines quality. This is the critical success factor apart from the ambience and the service delivery by floor assistants. The outsourcing of perfect blend of 30 variants of coffee is also a unique resource for Starbucks as without that it would not have been able to design a menu (GlobalData, 2010). The different style of coffee making: Irish, Italian, British, American, Russian are also key to the success of business. 2.4 Core capabilities The core capabilities are to know what the market asks from Starbucks which is closely linked to what and how Starbucks deliver. Drejer (2009) stated that the aspect of positioning therefore is critical for Starbucks to showcase their talent in coffee preparation. The intangibles of ambience, serving and the warmth are linked to the ability to leverage the deliverables in a smart mix form. The end result is customer loyalty factor which is essential for profits. This is primarily due to the research done over the years for that unique blend which leads to taste. 14 P a g e

16 TASK C: Starbucks Fit Analysis The use of customer data is critical to understand the type of customer the individual is. Thus the need to identify the customer s needs and wants has to be understood first. This is primarily to design the menu which is driven by the taste preferences. Starbucks need to look after employees first before serving for customers. This tenet is important where the one to one interaction between the customer and a frontline floor assistant will serve as the only point of contact apart from sipping the coffee. Therefore, encouraging employees to interact and engage in a meaningful conversation is necessary for the brand to survive. Drejer (2009) acknowledged that continuous customer engagement process and satisfaction has to be maintained to keep the cash registers ringing. Diversifying into machine driven instant coffee market segment, bottled cold coffee for corporate firms will be a penetrative strategy to enter markets where availability as a constraint is changed through instant coffee machine. The unique blend of coffee beans has to retain its taste, flavour and aroma which are the critical success factors for Starbucks (Clark, 2007). Training employees to pick up skill sets and competences to deliver excellence should be instilled. Employees should be motivated to be cheerful, for interacting with customers. Pay package, additional responsibilities, lateral growth and training should be used to retain employees. The culture fit is apt as per current trends, but the challenges of business have to understand better with operations strategy and employee support. Drejer (2009) concluded that the engagement of customers through the coffee and health has to be 15 P a g e

17 disseminated through small booklets, or role play inside the retail shop. This will remove apprehensions of coffee consumption which is harming the physique. Recommendations: Starbucks have to improve the internal support process and functions through the help of information technology. This will resolve the issue of sharing of information in the form of data to all the stakeholders. The Starbucks success typically rests on the cost of acquisition of a new outlet, the operational cost to a minimum which should be flexible and adaptive. The process should be demand driven, which is linked to store inventory. It will be updated every week so that the minimum amount does not fall below the threshold level. The management should foster openness across hierarchies to accept feedback, suggestions from customers (internal and external). Empowering employees to satisfy customer needs should be linked to performance objectives. Stressing on its sustainability agenda it should push change in customer orientation of energy usage, emissions and carbon footprint. Strategy to localise the menu along with globalised option is needed to make Starbucks adaptive to new environment. To compete with any big coffee chain brand, Starbucks should conduct annual taste survey to understand customer preferences of coffee over other. New innovation in coffee with hot and cold, mixing with ice, chocolate or cream, slush should be targeted at different age groups which are breaking away from the typical conservative coffee image. Progressive initiatives through coffee products which are great in taste and healthy choice will able Starbucks to segment the market as per taste trends. Coffee connoisseurs like either single taste or they try experimenting which will eliminate the aspect of monotony. Thus 16 P a g e

18 the ability to realign its processes and structure to defend the market position, its offerings are important for short to medium term strategy. The aspect of profitability factor should rule every SBU as this will ensure the revenue generation model is in line with the business objectives for Starbucks. 17 P a g e

19 References: Bell, D. (2009) Lattes Lure Brits to Coffee; Tea Sales Fall as Starbucks Draws the Young; Fighting Back With New Tea Flavors, Travel Cup, Wall Street Journal, p. B1 Brian, C. (2010). S&P Ups Starbucks Corps. Credit Rating. Available from: [Accessed 24th November 2012] Clark, T. (2007) Starbucked: A Double Tall Tale of Caffeine, Commerce and Culture, Little, Brown and Company, New York Drejer, A. (2009) Strategic Management and Core Competencies: Theory and Application, 4 th ed. Westport, CT: Quorum Books External environment theory, PEST analysis, Available from: [Accessed 18th November 2012] GlobalData. (2010) Starbucks Corporation - Financial and Strategic Analysis Review. Global Data Larson, R. (2008) Starbucks a Strategic Analysis: Past Decisions Future Options, Brown University Economics Department, Providence, RI. Moore, A. (2011) Starbucks Cut to Sell on Slow Growth, Higher Costs, Market Watch [Online] Available from: [Accessed on 27 th November 2012] 18 P a g e

20 Motley, L. B. (2009) Learning About Customer Satisfaction from Starbucks, ABA Bank Marketing, December, p. 43. Rushe, D. (2011) Coffee Rivals Give Starbucks a Wake-up Call, Times Online [Online] Available from: [Accessed 25th November 2012] 19 P a g e