Starbucks: Nadler-Tushman Analysis

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Table of Contents

Introduction
Environment
History
Business & Corporate-Level Strategy
Financial Performance
Resources
References

Introduction

In order to analyze Starbucks according to the Congruence model of Nadler-Tushman, we first have to define the various parts of this model as it relates to Starbucks. So we will first look at the organization as defined by this model and then analyze how well or poorly it functions, according to the desired and the achieved “outputs” at all levels.

Environment

The environment for Starbucks includes its history, the market, the culture, and the government regulations. We will briefly examine each of these in turn.

History

Three Seattle men, English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker, started the Starbucks Corporation in 1971. They sold fine imported fresh roasted coffee beans and coffee-making accessories. By the early 1980’s they had four stores selling the coffee beans, a roasting facility, and a wholesale business for local restaurants. “Their store did not offer fresh-brewed coffee sold by the cup, but tasting samples were sometimes available” (Thompson, Jr. et al, 2005). In 1982, Howard Schultz was hired as head of marketing and overseeing Starbucks retail stores. They did not listen to his innovative ideas. (Thompson, Jr. et al, 2005).

Schultz opened his own coffee bar in 1986 based on Italian coffee cafes, selling brewed dark roast coffee. By 1987 Schultz had expanded to three coffee bars and bought Starbucks from the original owners for $3.8 million. He changed the name from Il Giornale to Starbucks. His plan for the company was to grow gradually to 125 stores over the following five years. He wanted to create a superior management team by persuading top executives from other well-known corporations to join him. (Thompson, Jr. et al, 2005) Schultz had a total of 161 stores by 1992, and 1,015 stores by 1996, with plans to open over 2,000 stores by the year 2000. “Management expected to have 15,000 stores by year-end 2005 and 25,000 locations by 2013” (Thompson, Jr. et al, 2005). Starbucks is still one of the fastest-growing purveyors of Coffee in retail outlets.

Business & Corporate-Level Strategy

Starbucks’ corporate strategy has been to “establish itself as the premier purveyor of the finest coffee in the world while maintaining uncompromised principles (Thompson, Jr. et al, 2005). The six guiding principles are as follows:

Provide a great work environment and treat each other with respect and dignity.
Embrace diversity as an essential component in the way we do business.
Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee.
Develop enthusiastically satisfied customers all of the time.
Contribute positively to our communities and our environment.
Recognize that profitability is essential to our future success. (“Starbucks mission statement”, 2007).

Starbucks’ approach is to saturate an area, as Schultz believes the “Starbucks-everywhere approach cuts down on delivery and management costs, shortens customer lines at individual stores, and increases foot traffic for all the stores in an area” (“Starbucks Corporation, 2003). Starbucks is one of the fastest-growing companies in the country.

Starbucks sells premium brewed coffee beverages and beans through company-owned and licensed retail outlets. Starbucks also sells bakery goods, confections, and coffee equipment and merchandise. The retail outlets supply the ambiance and the friendly atmosphere that is associated with the brand. This has contributed to the success of the company. The coffee market fluctuates in prices and quality, but Starbucks changes blend whenever necessary to keep its quality high. Price is really not a big factor, since Starbucks’ customers are there for the atmosphere and the quality. Starbucks’ locations include transportation centers, bookstores, and shopping centers. They have recently branched into Supermarkets for their beans and ground coffee, and convenience stores with cold beverages.

Financial Performance

Net sales equaled US$5.3 billion in 2004, an increase of 30% over 2003. This was due to new store openings, higher revenues from existing stores, and growth in other business channels. Payroll costs increased because employee seniority created a need for medical and holiday benefits and higher wages. Starbucks needed more staff and paid higher prices for premium beans. In 2004, Starbucks reported a 46% growth in net profit. The operating margin increased to 11.5% in 2004, up from 10.4% in 2003. This was due to leverage with most fixed costs, an expanded revenue base, but it was offset by higher dairy and green coffee costs, plus higher payroll to support the company’s accelerated growth.

Starbucks Corp: Financial Summary 2000-2004

Resources

Starbucks was accused by the Workers’ Union for unfair labor practices and unfair pay scales as noted on the Union’s official website. Starbucks’ inability to settle the accusations in a timely manner seems to be a direct contradiction to one of its guiding principles of providing “a great work environment and treat each other with respect and dignity” (Starbucks, 2006). The labor force is the Company’s most important asset. They need to take better care of it.

Other resources Starbucks draws on include excellent market exposure, a highly recognizable brand, and a consistent experience for customers. Starbucks managers seem to be well trained and staff basically understand the company branding strategy. It is the quality of the coffee, the service, and the atmosphere of the coffee shops that is the key to their popularity.

In the past Starbucks has been slow to respond to changing environments, sometimes inaccessible to employees and their concerns, and culturally insensitive when moving into a new area. However, the company has shown that it is a “learning organization” and made changes needed, albeit sometimes a little slowly. Top management dictates the policy at every outlet but does not handle staffing, operations or choices made concerning stock. These decisions are left to the local managers.

Starbucks retail employees seem well trained and reasonably happy. There is no pressure for speed, but employees are expected to be friendly, deliver quality, and keep the premises clean and inviting. Most retail outlets succeed in this. Starbucks is more successful in recruiting needed employees partly because the premises are so welcoming and the quality of the products makes complaints rare. In foreign markets, such as China and Japan, the company has shown that it has learned to carefully consider the cultures within which they operate. There are many fewer problems with cultural faux pas than in the past. Starbucks hires staff among university students, so there is some turnover. However, they are flexible about scheduling in respect for the needs of their employees. In all, the stores are pleasant places to work.

Starbucks offers its benefits package to both part-time and full-time employees with dependent coverage available. Dependent coverage is also extended to same-sex partners. The package includes medical, dental, vision, and short-term disability insurance, as well as paid vacation, paid holidays, mental health/chemical dependency benefits, an employee assistance program, a 401 (k) savings plan, and a stock option plan. They also offer career counseling and product discounts.

Employee turnover is also discouraged by Starbucks’ stock option plan known as the Bean Stock Plan. Implemented in August of 1991, the plan made Starbucks the only private company to offer stock options unilaterally to all employees. After one year, employees may join a 401 (k) plan. There is a vesting period of five years; it starts one year after the option is granted, then vests the employee at 20 percent every year. In addition, every employee receives a new stock-option award each year, and a new vesting period begins. This plan required getting an exemption from the Securities and Exchange Commission since any company with more than 500 shareholders has to report its financial performance publicly-a costly process that reveals valuable information to competitors.

All of Starbucks’ employees have to go through extensive training in the first two to four weeks. The training includes classes on coffee history, drink preparation, coffee knowledge, customer services, retail skills, and a four-hour workshop called “Brewing the Perfect Cup” (Thompson & Gamble, 1997). For management trainees, they would have to attend further classes covering store operations, company policies, information systems, and the basic skills of people management (Thompson & Gamble, 1997). Starbucks’ employee training program has contributed directly to the success of the business.

Perhaps the one place where needs are sometimes not well met are local management. The pressures on retail managers is well compensated, but local managers are usually as high as they will go in the organization, so there is not much incentive beyond financial rewards and stability. Starbucks counters this with constant management training to keep a steady supply of managers. It is probably the best strategy, considering that operation of the retail outlets bears no relation to any of the functions at the head offices. They are two distinctly different and separate operations within the company. However, as long as the head office continues to communicate with local managers, it should continue to work. So this is one very important output from head office to local retail outlets. Communication must stay open and management training must continue.

The informal organization in Starbucks is also actually two organizations. The head office does the buying and makes all the choices of products to offer retail outlets. The solicit input from their local managers, and occasionally make a change based upon this input. The local informal organizations are within each of the retail outlets. Some local managers share bonuses with their employees. Generally, the relationship between the local managers and their staff are quite friendly, as managers always actually work in the outlet. Teamwork is mandated from above but willingly embraced at the retail level.

Management tasks are the usual of recruiting, training, ordering, scheduling, resolving problems with employees and the occasional customer, and handling the books and banking. Employee tasks require some training, which is given and paid. Some employees only serve at the register and clean the premises. Others are trained “Baristas” and make all the fancy drinks. Most employees are trained in all areas eventually. All employees are trained to deal with customers in as friendly a manner as possible. It is a very relaxed atmosphere.

The most important outputs to the organization beyond the relationships with their employees are their connections with customers and the delivery of a consistently high-quality product. This is handled very well by the well-trained employees. In addition, since speed of service is not considered critical, employees do not feel pressured to terminate conversations quickly. While there are rush hours, generally before work in the mornings, and at lunch hours, customers are not usually in a hurry. These factors may be the most important outputs because they establish the brand as representing good coffee in a welcoming atmosphere. As Benne Peto, HR director of Starbucks, explains: “The Starbucks experience is more than just the coffee itself. It is a whole experience you get when you come into a store – the one-on-one connection you should get with the managers and [staff] in-store. It is the whole environment.” (www.starbucks.com)

References

Thompson, Jr., A., Strickland III, A., & Gamble, J. (2005). Crafting and executing strategy. 13th ed. New York: McGraw-Hill.

“Starbucks Corporation: Competing in a Global Market.” UW Business School. 2003. Web.

Starbucks, (2007). Starbuck’s mission statement. 2008. Web.

Starbucks Coffee Company. Company Web Page. 2008. Web.

“Employee Profile – Starbucks: It’s all in blend.” Employee Benefits Magazine. 2004. pg. 37.

Thompson, A., Gamble, J. (1999) Starbucks Case Study. 2006. Web.

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