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KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

Final Report on STARBUCKS COFFEE


STRATEGIC MANAGEMENT
SUBMITTED BY GROUP D

Group members:
Garima Khanal Prasansha Dhakal Prem B. Karki Ritu Sharma Sailesh Mahat Sony Munakarmi Date: 13th January, 2013

[FINAL REPORT ON STARBUCKS COFFEE]

January 13, 2013

Table of contents
COMPANY BACKGROUND
Porters Five Forces Analysis

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STRATEGIES USED BY STARBUCKS TO BUILD THEIR BRAND STARBUCKS BRAND AND POSITION RETENTION DURING THE 2008 CRISIS
Strategic Steps to Retain the Brand and Position:

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SUGGESTIONS REGARDING THE STRATEGY FOR STARBUCKS GROWTH LESSONS LEARNT REFERENCES: ANNEXURE
SWOT Analysis

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Company Background
We are not in the coffee business, serving people. We are in the people business serving coffee -Howard Schultz (CEO, Starbucks) Starbucks; the largest coffeehouse chain in the world started its journey in the year 1971 as a local roaster and retailer of whole coffee, tea and spices with a single store in Seattles Pike Place Market. Starbucks was the first company to innovate the idea of coffee culture in America. With the objective to establish itself as the most recognized and respected brand in the world, Starbucks today has been able to globally expand its business with its outstanding products in nearly 18,000 retail stores in around 60 countries. The company pursued product expansion along with market expansion. Today, Starbucks offers an attractive range of products to its consumers that include coffee, merchandise, fresh food and even merchandise such as coffee brewing equipment, mugs and accessories; with its brand portfolio comprising of Starbucks Coffee, Seattle Best Coffee, Tazo Tea, Evolution Fresh, La Boulange and Torrefazione Italia Coffee. In the year 1992, Starbucks Corporation went public at a price of $17 per share with its common stock being listed on NASDAQ under the trading symbol SBUX. During this time, the company had less than 200 retail stores and within a span of twenty years the company has been able to grow tremendously. This growth has been backed by the companys continuous efforts to expand its retail operation and grow its specialty sales and other operations. As a part of diversifying into other areas of business, Starbucks also started its entertainment division. Starbucks aims in providing a new and unique experience to everyone involved with the company. Undoubtedly, the company gives its consumers a different kind of feeling about drinking coffee; along with this it has also been able to provide its employee, called as partners, with a different kind of experience to work. The company offers several kinds of benefits to the partners including vision, health and dental insurance. Along with this Starbucks avails it

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partners with stock option grand share. The attention and working atmosphere the company provides to them has rightly led to the success of the company as a result of which the company was rated as the 11th best place to work in the United States by Fortune Magazine in 2005. Through the Starbucks Experience that the company provides to every stakeholders, it has been able to build an excellent brand identity and reputation all around the world.

Porters Five Forces Analysis


Threat of new entrants: The treat of new entrant is also medium for Starbucks because of the considerable entry barriers it has created because of its reputable brand and positioning. Treat of Substitute: The Pepsi and Coca Cola are the primary substitute products posing a potential threat to Starbucks coffee as they are also caffeinated soft drinks. However, there is the large difference in the test and demographic makeup of customers of the two products. The only true direct substitute for Starbucks coffee available is basic coffee and due to the unique taste and high quality of Starbucks coffee we can conclude that treat of substitute is low. Bargaining Power of Buyers: Bargaining power of Starbucks buyer is low as it provides quality products at premium price and there is large number of buyers and single buyer does not consume high proportion of its products. Similarly, there is less chance that buyer will integrate backward as Starbucks is a retail chain and its customers are the end customers. Bargaining Power of Suppliers: The bargaining power of suppliers to the specialty coffee industry would be exerted by the suppliers threat to increase the price, decrease quality or forward integrate. The major suppliers of Starbucks are the producers of Arabica beans which are used in the production of dark roasted coffee. The suppliers of Arabica beans are mostly small to medium-sized family owned farms

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and typically sold their crops to processors through local markets. These farms were numerous and unrelated to one another, with no unionization, giving them very little collective bargaining power. Competitive Rivalry: Starbucks has branded itself as a premium product to the high end customer group. There are many competitors selling coffee but they do not have the focus that Starbucks has maintained. So, we can say that competitive rivalry is medium.

Strategies Used by Starbucks to Build their Brand


Starting with the mission, To inspire and nurture the human spirit- one person, one cup and one neighborhood at a time; Starbucks is the brand with an ambience of maintaining the relationship with customers. With the brand tactics Howard Shultz has enlighten the brand to the extent that the customers and employees are associated as partners. The warm feeling of brand gives an impression of belonging. The drink served in Starbucks is never left for the chance but rather it is consistent all over the world in all stores and all the time. Starbucks is one of the valuable brands in service industry. In terms of brand awareness while any one talks of the coffee, Starbucks has positioned itself to be in the top position. Even though there are not physical stalls all over the world, still people have heard the name of Starbucks. The experience that it provides is unique and appealing. Starbucks is not only selling a coffee, it is selling a lifestyle to the people, an experience which can be called Starbucks experience. Still the logo is ambiguous and the picture of mermaid is confusing. It does not relate with the theme of coffee. More than taste of the coffee people associate Starbucks with happy and relax. In terms of generic strategies Starbucks has used differentiation strategy as perceived in Micheal Porters terms by placing its coffee as a premium coffee; even though its original intension was differentiation focus. To pursue the differentiation strategy the company invests much on Research and development in order to improve the quality. The other strategies that are

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used by Starbucks can be named as positioning strategies and growth strategies ; being 33% shareholder of coffee market share in US. Starbucks is renowned to use these strategies in an amazing way, to achieve its best and be a survivor from 1871 till now. Born as a bean distributor, today Starbucks is the leading brand to sell coffee in the world. To facilitate the advantage of having growth, Starbucks has used strategies as market share expansion, driving out competitors and up bring the usage rate from the existing customers. The first strategy that Starbucks has used is the positioning strategy. They have well defined target audience. Positioning is to make the company standup and identify for a particular factor. The Starbucks was positioned as a friendly and comfortable brand. Starbucks knew well which customers to serve and who are their main customers and they work accordingly. They knew the demography that they should serve; adding up they also knew the psychographic segment that the company needs to handle. When a brand knows the positioning that they need to do, the brand is well communicated and hence serves itself as a well strategy to build the name. The brand is made comfortable by having perfect and smoothing furniture and fixtures where customers can relax and have an experience of having a second home. This is to enhance the time that customers spend in the shop, more time they spend more coffee sales Starbucks will make. Starbucks knows that their main customer which is related to the life style of target segment. Age wise the customers of the Starbucks customers are aged between-25 to 40 years of age. Also not forgetting the young adults aged 18 to 24 who accounts for 40% of the total market share of Starbucks. Psychologically, Starbucks is targeting the people who value good business conduct and the ethical customers. Business ethics and compliance is a program to support the overall mission of the company. Starbucks has a conduct of inclusion, accessibility and equality. These three are achieved through the use of other parties as partners, customers, suppliers and communities. This drives the customers who are ethical and who love good business conduct. The evidence of growing the market through excessive penetration by Starbucks can be known from their data of having 17000 stores in 49 countries. They used so called geographical expansion strategy, by expanding to unknown and new markets. They could offer the existing products to such a new market. The penetration was done also by selecting the right location

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strategy. The stores are located in the busy area, mostly near colleges and offices, to locate the customers easily. They are highly visible brands. The stores were huge in numbers in the same area, even though, the size format was differentiated. Not only this, the brand has increased the penetration through the introduction of Starbucks reward card. This would retain the old customers. Starbucks has time and again used growth strategies in numerous forms, when the company has to introduce a new product to the existing market Starbucks used product development strategy. Starbucks is renowned for using right strategy at the right time. While having a product development strategy; Starbucks developed more than 30 blends of coffee, single origin coffee as well as other variety of drinks as hot and iced beverages espresso, Tazo teas etc. The use of such strategies (product development) was done by Starbucks when it faced the condition of cash cows where their market is saturated with the numerous stores that they have. They even developed the drink for health conscious customers, because they knew they had to hold the market share as a market leaders and in any cost they could not handover the customers to the competitors. The company also unfolded the diversification strategy while the brand starting facing saturation point. The lowering sales in Starbucks but still holding the maximum of the market share, made them think of concentric as well as conglomerate strategy. This can be shown by their move to enter unrelated markets as CDs, Oprah book club collections etc. This shows the level of risk taken by Starbucks to expand its hands in the coffee market. Thus, through the years Starbucks has been able to make its place as a premium coffee maker, they make sure that quality is been assured for the price that the customers pay. Starbucks has made a strong brand identity to be related with European lifestyle, indulgence, status symbol, expensive and rapid expansion; with this identity the brand goes connected with the adults and young adults; who indulge themselves with the lifestyle of modern urban people.

[FINAL REPORT ON STARBUCKS COFFEE]

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Starbucks Brand and Position Retention during the 2008 Crisis


In 2008 Starbucks suffered a rough economy and its own strategic missteps, because of which the former CEO (Schultz) had to return. The failures and crisis faced by the company can be briefly summarized as below: Leadership Failure: Due to unsuccessful succession planning company failed to have appropriate leadership to move through the crisis phase without affecting its brand and position. Changing Customer Behavior: Consumer at that time started questioning their expenditure and high cost products because of their shifting spending pattern. Starbucks that was targeted on the high end customer had shifted because of changing habits of customers. Financial Crisis: to top the consumer behavior shifts, the financial condition and the economic recession posed a greater threat for the company. The prices of gas and other essentials had significantly increased thereby making the pricing mismatch. The company was in a dilemma about how to tackle the situation where customers started considering their products expensive and the increasing prices. Due to this sales had declined significantly thus impacting its position in the market. Media Disruption: At this time of crisis another threat to the company was to lose its earlier built brand and position in the market due to media disruptions. Various negative news and information about the company was being communicated by the media that made it harder for the company to maintain its brand and position. Questionable Sustainability: the main reason for its questionable sustainability was its faulty strategy of rapid expansion at the difficult time where customer behavior and economic conditions were so crucial.

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The company faced the challenge of preserving and enhancing its integrity of their precious assets such as their values, their culture and the guiding principles so as to maintain its brand and position at that difficult time. After the re-entry of the past CEO and the founder of the company various actions were taken in order to build and sustain the brand and position of the company that was in the verge of disaster. Core Competencies: Most importantly, the company tried to maintain its core competency. As expressed by Schultz, We confronted these challenges by reaffirming our core values and reinventing our company from the bottom up. In spite of the decreasing customer base, it tried to build on its values, culture and its guiding principles and did not let it slip along the way. Trust among People: Another thing that was considered important is to establish the trust among the employees in spite of the layoffs it conducted. Starbucks believed people as its major strength and so as to develop trust among the consumers, building trust among the employees was necessary. It did this by accepting their mistakes in front of them and conducting open mike sessions to let them know that their voices will be heard. Avoidance of Wrong Turns: Despite the pressure from stockholders to carry out activities such as reduction in the quality of the coffee, selling of the company and cutting out the expensive health-care plan, the company kept its stand and avoided making such mistakes in losing its brand and position. It tried to focus on its core competency of providing high quality services instead of responding unreasonably to challenges. Building trust among employees and maintaining its brand and position by focusing on its mission statement was what guided the company away from these missteps. To cope with the crisis situation, consultants were hired to devise strategies for the hurtful economic conditions. One suggestion was to create the fast food style combos, where a discount is offered for purchasing a food item with a beverage. But these wrong turns were avoided because Starbucks understood that it would dilute the perception of Starbucks as a premium brand and could potentially cost them their position in the market as well as encourage the competitors to attack.

[FINAL REPORT ON STARBUCKS COFFEE]

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Strategic Steps to Retain the Brand and Position:


Closing down of stores in 600 underperforming US based stores and opening of stores outside North America where business remained robust. By strengthening its international operations Starbucks tried to cope with the condition of changing consumer behavior and economic downturn. Earlier they had less than a 1% share of coffee consumption outside North America. It viewed this as a market opportunity to increase sales and profit by serving the untapped market and building brand and position internationally Retraining strategy was taken so as to maintain the high-quality image of the company so as to remind its employees and stakeholder what they actually stood for i.e. pursuit of an undisputable and complete commitment to quality. To re-energize staff and renew the focus on values and culture 10,000 store managers were taken to New Orleans to carry out work on houses, planting trees and an urban garden. This was a strategy to make employees have a sense of collectiveness. Focus was instilled on one cup. Instead of conducting promotion strategies using discounts and trying to attract customers it tried to focus on its mission of providing coffee to inspire and nurture the human spirit one person, one cup and one neighborhood at a time. As the brand image of the company was of a premium store, it tried to operate based on that image and not shift its focus. For retaining the brand, Starbucks also took help from social media, because with changing environment and seismic shift in how people gained access to information and also how they are behaved, social media could play a role in promoting the brand and help retaining their position. For making people aware about its original focus on premium product there was no better way of letting people know.

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Suggestions Regarding the Strategy Formulation for Starbucks Growth


Starbucks is one of the fastest growing brands worldwide and has become one of the Top 100 Brands in 2007. However, Starbucks is not immune to the threats posed by the external environment. It is very essential that the businesses must be on their toes all time to gain the success and avoid the failures. Starbucks should regularly adjust its strategies according to the changing situation. To sustain in this ever changing dynamic environment, every business including Starbucks needs planning and good strategy. There are various steps Starbucks could take which will help them to attain the success and avoid the failures. The success of a company not only depends on strategies formulation and implementation but it also depends on the employees of that company. Starbucks had faced some issues related to the dissatisfaction of the employees and problem of unionization. So, it is very pertinent that Starbucks should work on creating a positive working attitude among its workforce and overcome the increasing dissatisfaction among its employees. Having its core competency in coffee, with the development of new products; still Starbucks should be able to improve the quality of the core business or the center of gravity i.e. coffee Instead of rapidly expanding the Starbucks chain (growth strategy), especially in US as it can cannibalize the sales instead, the company could focus more on marketing products in the stores that have already opened. But should carefully plan its international expansion by properly conducting research and knowing well about the country and its environment before moving in. This would further increase the market development of Starbucks. As per now they are into differentiation but with the type of customers they deal with in International market, they must also look for penetration strategy.

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Moreover the advertisement expenses that Starbucks is doing right now are very low; it must further increase its advertisements to promote the existing stores sales. As entering to new market the company must promote its product successfully.

Starbucks should perform the external audit on a regular basis, so that they can grab the opportunities as well as shield from various threats possessed by the external environment. . This would be done by having the analysis if SWOT and PEST analysis on monthly basis. Starbucks is generally operating successfully in foreign markets; however, it is facing the increasing tough competition in Japan and UK. Also the increasing competition in US is also posing a threat, with McDonald on one hand is entering coffee market with McCafs line extension and Dunkin Donuts on other hand is also expanding resulting in the declining revenue growth of Starbucks. The company is entering in rapidly growing foreign economies with lots of risks associated like cultural differences for instance. For example, after a huge anti-Starbucks campaign, it has to close down its outlets in China due to cultural differences. Starbucks has no option but to expand to maintain its growth but it is opened to risks whereas the market of US is saturated. In order to minimize the risk associated with foreign market expansion, Starbucks could go for joint venture or franchise which have worked well in the past too. Similarly, the company should be taken into account the changing economic situation and economic conditions. Though it is not under the control of the company but analyzing external environment allows the company to be prepared for any new unexpected development and strategize accordingly.

Starbucks should continuously work on reviving its brand image and reputation . There has been acquisition against Starbucks with negative publicity about Starbucks supplier treatment and anti-competitive practices. Starbucks should thus, navigate its brand to a market position and improve both its brand image and reputation.

The customers are very important for any business and Starbucks has tried to maintain and improve relationship with their present customers as well work on increasing the

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customer base. Thus, Starbucks should continue with these kinds of strategies as mentioned previously which has helped improve the success of Starbucks. Development of new products is also recommended for Starbucks in order to continue their product development strategies. Different varieties in the product need to be developed for different international markets, if Starbucks wants to properly enter each one. Starbucks should not just depend on its beverages products in order to maintain their position. They should continuously work on variety of products development which caters to the tastes of people beyond only one geographical boundary. It should work on maintaining its innovative skills and continue offering new differentiated products. Thus resulting in more diversification strategies but maintaining its core focus on coffee.

Lessons Learnt
Building brand is not enough. Brand and position once created must be retained for ensuring the long-term prospects of the company. Brands should be built and retained on the companys core competency, its vision and its mission. By understanding the companys mission and doing what it is supposed to do, one can cope with the external forces that affect it, Building trust among the people it is responsible towards is very important for a company to achieve its goals and be successful Expansion strategies must be implemented keeping in mind the external forces and changing environmental conditions rather than just opting for it. Company must always focus on its core competency rather than shifting its focus to meet the growth or expansion needs. Leadership plays a very important role in companys sustainability and success as decisions can be wrong sometimes. It the RIGHT approaches - to accept the missteps and take timely corrective action - what actually matter.

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One should have a proper knowledge of the positioning and target market for building brands. If the company knows who the main customers are they can communicate and serve them well.

Strategies should be made according to the time and need of the organization, when times comes even diversification strategy can be implemented.

Brands can be made feel positioned even with the outlets and the proper ambience and the services. They must make sure that services are made as per the price paid by the customers.

To make sure that customers do not get switched, brands should even work on new demands situation and needs provide; as Starbucks did by having a health drink.

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References:
Magazine, c. (2012). - http://www.cnbcmagazine.com/story/how-one-brand-changed-theworld/1297/1/. Retrieved from www.cnbc.com. HBR. (2012). - http://hbr.org/2010/07/the-hbr-interview-we-had-to-own-the-mistakes/ar/1. Retrieved from www.hbr.org. http://studenttheses.cbs.dk/bitstream/handle/10417/577/ea_elisabeth_finn_nielsen_og_tina_holm _mortensen.pdf?sequence=1. (n.d.). Retrieved from www.studenttheses.cbs.dk. success. (2012). - http://www.success.com/articles/1272-rekindling-the-heart-soul-ofstarbucks?page=2. Retrieved from www.success.com. Times. (2012). - http://www.time.com/time/magazine/article/0,9171,1955588-2,00.html. Retrieved from www.time.com. Times, N. (2012). http://topics.nytimes.com/top/news/business/companies/starbucks_corporation/index.html . Retrieved from www.topics.nytimes.com.

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Annexure
SWOT Analysis
Strengths Motivated workforce Well established and growing brand recognition Product and brand consistency Wide variety of product offerings Offers free Wi-Fi in stores and a comfortable space for its customers Innovative/Progressive Strong brand image associated with quality coffee and excellent customer service Ethical values Opportunities More products can emerge while adapting to other market Creating a coffee house experience in g lobal target markets Can focus on emerging economies Opportunity of third house experience Opportunity for strategic growth initiatives Can increase its knowledge in new technological advances to use in st ores With continued domestic expansion, it can reach domination of its segment More promotions/coupons/discounts Weaknesses Needs more of a wide spread customer base Prices continually rising Increasing number of competitors Small size of stores Limited products at different locations Prices high as compared to competitors Leaders are too cross functional in management Not available to all target segments Not enough Drive-Through services Starbucks locations are scarce in suburban areas Not enough bilingual employee Lack of coupons, deals and promotions Threats Relies on international trade for its coffee beans Must comply with international governments for production and distribution Very competitive environment with leaders in the restaurant/food business Cultural values and routines may interfere/not adapt with the coffee house experience Issues of negative publicity against the brand due to fair trade conflict with coffee bean farmers in Africa Younger domestic market is being alienated from t he Starbucks brand due to cost Recession or downturn in the economy affects consumer spending

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