Strategic Analysis of Starbuck’s Strategic Management

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Table of Contents

Introduction
Company Strategy Settlement and Development
Starbucks and PEST
Starbucks and SWOT
Conclusion
References

Introduction

Starbucks is a polarizing brand; consumers either embrace its ethos completely, or see it as a symbol of the worst excesses of American capitalism. Branding experts believe that it is this profile – combined with the company’s stateside origins-that places Starbucks in the firing line of the burgeoning anti-capitalist movement. The first Starbucks outlet outside the US opened in Tokyo in 1996. Since then, the company has launched in more than 40 other countries. Next month, Starbucks will celebrate 10 years of operations in the UK, where it has transformed coffee from breakfast staple to lifestyle accessory – a process supported by its much-publicized partnership with Apple, its Starbucks Entertainment division, and the Hear Music brand, through which the company markets books, music and film. While Starbucks has faced fierce criticism it will celebrate 10 years of operation in the UK next month and is suffering from slowing growth in the US, the global brand should not be written off prematurely. Starbucks has achieved remarkable success in Asia.

However, the signs of strain in the US are undeniable, and analysts have voiced concerns that Starbucks has overstretched itself with its plans to reach 40,000 stores worldwide. In the three months to the end of September last year, the company’s US outlets posted a 1 % fall in transactions. One leading retail analyst draws parallels with McDonald’s. Starbucks is another brand setting its sights on the international market for growth because it is feeling the competitive pressure in its home market.

Company Strategy Settlement and Development

Strategy Settlement

Starbuck’s strategy has been to establish itself as the finest provider of coffee in the world while maintaining an uncompromised principle of quality. These principles are vital for the maintenance of a great and proven work environment for staff member in every retail stores. The company aims to satisfy customers and give back to the community and environment (Holmes, 2007). It persists to be profitable by a strict, slow growth policy which dominates the market before setting its sights further abroad. This strategy has helped the company grow into the fastest growing companies in the world.

Strategy Development

Starbucks under the company’s owner, Schultz has practiced a policy of strict and slow growing. All the stores have been improved in order to grow the business. Starbucks aims to grow and expand in other areas of the United States as well as many countries. Future joint ventures will expand the products into grocery and convenience stores by bottled beverages and ice creams (Haoting, 2006). Starbucks also engages in social work like providing financial assistance to local community programs. The financial performance in recent years has been good with consistent earnings growth over this period. It has also managed to decrease long term debt over the period (Strehle, 2007).

Starbucks and PEST

Political Factors

Since its arrival in the UK, there has been no let-up in Starbucks’ quest to dominate the high street. A seemingly relentless store-opening program continues apace with plans to open 100 outlets in London this year, and one every fortnight over the next decade a total of 750 by 2018. According to management consultants Allegra, the UK branded coffee chain market now has an estimated turnover of £1.3bn a figure that is forecast to double over the next decade, as the total number of stores in Britain reaches 6000 (Holmes, 2007). Nonetheless, Starbucks’ appears to be hitting the right note in the UK. A survey of 6300 UK consumers, conducted by Allegra, found that it was the country’s most popular coffee chain, and has ‘gained ground’ both in terms of its perception ‘as an ethical brand, and for fair treatment of its suppliers’ (Holmes, 2007). However, the UK operation has its own approach to marketing. Despite this, the company is preparing to launch a campaign offering customers a fresh coffee if they are not satisfied with their purchase (Miller, 2007).

At the moment, Starbucks is focusing on corporate social responsibility, and it is in the process of recruiting a head of communications and CSR. While Starbucks may be in vogue with UK consumers for now, if the chill wind blowing across the US business makes its way over the Atlantic, it may need to rethink its strategy on these shores, too.

Economical Factors

The public explanation as to why Starbucks is so successful, as suggested by Howard Schultz, who with David Olsen acquired Starbucks in 1987 from its founders, is that the company is absolutely dedicated to brewing the best cup of coffee in the world. It acquires its own coffee beans, roasts and grinds them, and has strict controls on temperatures at which each specialty drink is mixed and served. It also enjoys tremendous publicity for the way it treats employees, backing up its idea that happy employees treat customers well. It offers stock options to full-time employees and medical benefits even to part-timers. It ranks third on the Fortune 2005 list of one hundred best companies to work for. Analysts suggest that the primary reasons that Starbucks might succeed are that American products are well accepted in China (they note the success of McDonald’s, KFC, and Pizza Hut) and that by “focusing its attention on its employees, Starbucks has created a strong service culture that fits well in China.” (Miller, 2007). Coffee sales in the United States had been declining for several years, hurt by medical research reports suggesting that caffeine creates several health problems (Holmes, 2007).

Social Factors

Starbucks now operates well over 1,000 international outlets, with hundreds more on the drawing boards. A large portion of its international business is in Asia, where it has 850 locations (in Australia, Indonesia, Japan, Korea, Malaysia, the Philippines, New Zealand, Singapore, Taiwan, Thailand, the Chinese cities of Beijing and Shanghai, and the Hong Kong and Macau SARs). Starbucks plans to continue expanding its presence throughout Asia, and Schultz feels that one day it may be operating more restaurants in Asia than it does in North America (Sanders, 2006).

Technological factors

Starbucks has been continuously striving to improve its operational efficiencies using technology. For instance the introduction of Starbucks Card provides the opportunity to improve customer service, shorten lines and make a customer’s visit to Starbucks quicker and convenient. It deploys Blue Martini order management systems to its retailers and channel partners. This system allows Starbucks to centrally manage and deliver contract based products and pricing in different languages for its global distribution.

Starbucks and SWOT

Strengths

Japan offers the closest example. In a nation with a tightly knit Asian culture that also drinks tea, Starbucks opened its first outlet in 1996 in Tokyo’s Ginza district (it always chooses premium spots). By 2003, it counted 503 locations in Japan. But its U.K. venture also is relevant. In yet another tea-drinking nation, the company opened a London location in 1998, quickly acquired the 64 stores of a copycat competitor called the Seattle Coffee House, and now has more than 130 coffee bars. The BBC, in announcing entry by Starbucks into Great Britain, wrote that “if the company succeeds in establishing a major foothold in Europe, it will indeed be the equivalent of carrying coals to Newcastle” (Miller, 2007). Consequently, Starbucks continues to raise its estimates of how many locations it will ultimately have worldwide, now suggesting it can achieve 25,000 in a decade. Some analysts suggest it ultimately will exceed McDonald’s 29,000 storefronts (Zackfta, 2006).

Coffee sales in the United States had been declining for several years, hurt by medical research reports suggesting that caffeine creates several health problems. The Starbucks atmosphere invites guests to slow down and relax, converse with friends, or read a paper. Since each cup of coffee is brewed separately, and patrons make their own choices of combinations of flavors and enhancements, it conveys a message of personality and individuality to each customer. The novelty of Starbucks will attract first-time customers, but its lifestyle environment should ensure that even tea drinkers will come back to enjoy the “mystery and romance” of a Starbucks cup of coffee. Starbucks has not stumbled much in any of its new ventures. In the past five years it has doubled its revenues, growing from more than $2.6 billion in 2001 to nearly $5.3 billion in 2004 (Miller, 2007). Its string of successes in different cultural settings augurs well for how it will do in China.

Weaknesses

It’s a major epiphany for a brand that’s been one of the marketing world’s premiere case studies on how a commodity can be transformed into a premium-priced object of desire, or habit, by creating a comfortable spot in which to buy and consume it-that third place that’s neither home nor work. Starbucks’ brisk growth-stores now number more than 13,000, and the company wants to get to 40,000-raises the question of whether it’s possible to scale the kind of experience that made Starbucks what it is without losing the flavor (Allison, 2006). In spite of innovations and joint ventures, Schultz’s team is hard-pressed to grow profits in a home market that is quickly becoming saturated, with thousands of stores across the United States and Canada. In Seattle, there is one Starbucks outlet in every twenty-four square miles, and in Manhattan Starbucks has well over one hundred cafés, or about one for every twelve thousand people. Although total U.S. saturation is expected in the near future, the company is convinced that it can export its American brewed concept around the world. In July 2000, Schultz showed his commitment to Starbucks’ plan to expand globally by stepping down as CEO and assuming the role of chief global strategist (Zackfta, 2006).

Opportunities

Building on early successes, Shultz and Olsen wanted to expand Starbucks beyond the Pacific Northwest. They rejected the idea of franchising, however, because they did not want to jeopardize the quality of their products. To raise the additional capital needed for growth, in 1992 Shultz led the company in an initial public offering, raising $29 million. Shortly thereafter, the company opened stores in Washington, D.C., New York, and Boston (Miller, 2007). As a supplement to the growth provided by new outlets in the United States, Starbucks has pursued a variety of innovations and joint ventures. Starbucks experimented with new concepts, such as expanded food menus and drive-thru service, but neither of those options was pursued because management felt that they took away from the core business. On the other hand, a cold coffee drink called Frappuccino brought new customers into the shops and also led to a grocery-store version marketed through a joint venture with Pepsi. Other cooperative efforts have led to coffee sales in a variety of new outlets, including grocery stores, bookstores, schools, airlines, cruise lines, and hotels. Starbucks has also expanded its reach into complementary markets. For example, the company owns Tazo, an Oregon-based tea company noted for its chai. Starbucks is viewed as one of the great business success stories in the past two decades. In total returns, it soared more than 2,200 percent over the decade ending in 2001, surpassing Wal-Mart, General Electric, PepsiCo, Coca-Cola, Microsoft, and IBM in total return. Starbucks’ sales have increased an average of 20 percent annually since the company went public in 1992. As of 2001, Starbucks had more than fifty-seven hundred retail locations and fifty-four thousand employees worldwide (Miller, 2007). Starbucks opened its first restaurant outside North America in Tokyo in August 1996. Japan was chosen because it is the third largest coffee importer in the world. Schultz believed that going to Japan was an essential part of Starbucks International’s expansion plan. For the company’s international operations, Schultz decided that it was best to form partnerships with local operator (Ferrell, 2008). The Tokyo outlet was opened as a joint venture with Japanese retailer and restaurant operator Sazabu. In six years, the number of Japanese outlets has grown to 368, beating Starbucks’ own projections. The most populous Asian market, and the one that possibly holds the most potential for long-term growth, is China. Understanding the opportunities and challenges that Starbucks faces in China requires an appreciation for the distinctive political, economic, socio cultural, and market forces that have been shaping that country and its demand for coffee (Zackfta, 2006).

Threats

Starbucks now adds eight to nine new shops per year each in Beijing, Hong Kong, and Shanghai. These affluent locations have high concentrations of young, upwardly mobile workers who are relatively open to Western products. With a population of more than a billion people, China is a major opportunity for Starbucks. However, the Chinese market is drastically different from the U.S. market. Coffee is by no means a mainstream beverage on the mainland. Compared with tea, coffee is a relative newcomer. The average annual coffee consumption is only one cup per person (Boone, 2007).

Command of a premium brand – where a cup of coffee would typically cost 50 cents, the charge at a US Starbucks is around the region of $1.75. Consumers are willing to pay these higher prices, it seems, because they are not only buying a beverage, but also making a social statement at the same time. Whilst these intangibles can be extremely difficult to measure, Starbucks’ customers are making the job easier by swarming in their thousands.

Whilst McDonald’s is famed for its ultra-fast location assessment and business set-up process, Starbucks has adopted a slightly more cautious approach, particularly in its foreign markets. Far Eastern Economic Review explains how the final decision to open a new outlet is based upon the “mix of pavement traffic analysis, location based buzz and local real estate savvy” (Miller, 2007). In China, outlets have increased steadily from 8 in 1999 to just fewer than 70 today. But by relying on cafes to market themselves, there is the inevitable heavy dependence on a strong brand and word-of-mouth to spread a positive reputation. The McDonald’s approach to corporate growth very much embraces the franchise model. But up to the present day, Starbucks-owned and operated sites outnumber licensed ones by almost 3 to 1. With this approach, questions remain about the corporation’s ability to achieve its growth targets. The Starbucks-owned outlets may be reassuring news in terms of policing brand image and consistency, but the opportunity cost comes in the form of reduced flexibility and agility. The pursuit of global expansion has also metamorphosed into an ongoing and often desperate battle to win hearts and minds. As the anti-globalization groups gather force, there is hardly likely to be any time to rest (Zackfta, 2006).

Conclusion

Of course the route to the top is never perfectly smooth, and Starbucks itself is no stranger to criticism and controversy. There are numerous “anti Starbucks” Web sites, which provide various levels of detail about alleged mistreatment of suppliers and anti-competitive practices. What is not, however, is that this negative publicity is bad news for the Starbucks brand. But for all the negative publicity, there are also many shining examples of good corporate citizenship. For instance, Starbucks was among the first companies to offer health benefits and stock options for part-time employees. And in an interview with Business Ethics Magazine, CEO Orin Smith is quoted as saying: “social responsibility is not an add-on to our business – it’s an essential part of who we are” (Zackfta, 2006). Although an easy declaration to make, Fortune magazine reports how founder Howard Schultz has won the respect of many critics through his handling of a robbery at one of his Washington caf6s in which three Starbucks employees lost their lives (Zackfta, 2006).

References

Allison, Melissa. Starbucks Takes Unique Approach to Marketing. The Seattle Times. (2006).

Boone, Louis E. and David L. Kurtz. Contemporary Marketing. United States. Thompson South-Western 12th Edition. 2007

Ferrell, Fraedrich, Ferrell. Business Ethics Ethical Decision Making And Cases 7e. Boston, MA: Houghton Mifflin Company, 2008.

Holmes, S.(2007) Planet Starbucks, In the Business Week, The McGraw-Hill Companies Inc, New York

L. Miller and R. Sanders. “Sturbucks Corporation,” Prudential Equity Research. 2007.

Lu Haoting. 2006 Starbucks still brewing up a storm in China In the China Daily. (North American ed.). New York.

Miller and Sanders, “Starbucks Corporation.”, Thailand Knight-Ridder/Tribune Business News. 2006

S. Holmes, I. Kunii, and J. Ewing, “For Starbucks, There’s No Place Like Home,” Business Week, 2007.

S. Zackfta, “Starbucks Corporation, Around the World in 80 Days,” in William Blair & Co., Equity Research, 2007.

Strehle, P. and Cruickshank, M. (2007) Starbucks – international business concept and Starbucks in Germany, University of Lappeenranta, Finland.

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