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Module 12: Decision-Making Processes

Case Study: Resuming Internationalization at Starbucks

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MGMT 5135

Fall 2012

Team 2

November 18, 2012

Team Members

Conway, Ashley

Heasty, Mark

Johnson, Laura

McDonald, Adrian

Sarkis, Christine

Business Goals

The first Starbucks was opened in Seattle in 1971 to sell coffee beans and coffee-making equipment. CEO, Howard Schultz turned the store in a coffee shop and had tremendous success. When the demand for coffee increased, so did the urge to expand.

In the wake of global economic recession in 2008, Starbucks was faced with a critical strategic decision: Should the company resume its international expansion and once again intensify its commitments in overseas markets? If so, what approach should the company take? Had the pace, rhythm, and scope of its previous internationalization in the coffee industry affected company performance? What could Starbucks learn from its prior internationalization approach within the coffee industry to guide its future international strategy?

S.W.O.T. Analysis

Strengths

• Extreme Growth – From the time Starbucks went public in 1992, it experienced tremendous growth. They went international in 1996, and by 2009 Starbucks had nearly 17,000 stores in 56 countries (p. 1). Revenues grew from $160 million in 1993 to $10 billion in 2009 (p 5)

• Demand for coffee globally – by 2010, 501 billion cups of coffee were being consumed yearly (p 2) Starbucks was the industry leader in the specialty coffee business and had a distinctive Italian style coffee house culture.

• Coca-Cola – Starbucks had a limited partnership with Coca-Cola in 1996. They signed an agreement with Kraft in 1998 to market and distribute the Starbucks specialty coffee beans to more than 25,000 grocers.

• New Focus – Starbucks realized their lack of focus on the U.S. stores and decided they would slow the pace of U.S. store growth and renew its focus on its store-level unit economics (p. 3). Decision to close 1000 company operated stores globally resulted in $580 million in cost savings.

• Seattle’s Best Coffee – Acquisition of Seattle Coffee Company provided 65 stores and a presence in prime locations in the United Kingdom. Starbucks worked with McDonalds to sell this brand of coffee in its stores (p. 3). Starbucks was able to maintain its market share against McDonalds.

• Starbucks Via – A new line launched by Starbucks which was a cheaper instant coffee brand which allowed Starbucks to enter a new market(p. 4).

Weaknesses

• Incorrect Focus – Starbucks focused too much on expanding the business globally instead of improving customer service – this caused decreasing product quality and company image. They felt this was to blame for the increased competition (p. 3).

• Starbucks is vulnerable to economic and supply inequities in its market.

• Starbucks received criticism: for growing too fast, for cannibalizing turnover in closely located stores, for decreasing product quality and company image and for driving out small independent competitors (p 8)

• Over estimating the distinctiveness of their marketing approach (p.3)

• Reported child labor practices (p. 5)

Opportunities

• Market Growth – Worldwide consumption had grown 6.9% annually by 2010 (p. 2). The percentage of U.S. adults drinking specialty coffee on a daily basis had grown from 3% to 17% annually from 1995 to 2008 (p. 2). From 1981 to 2006, the market share of specialty coffee increased 1% to 20% and accounted for approximately 1/3 of the $40 billion U.S. coffee industry (p. 3).

• Publicly traded company thus has access to financial markets for funding growth.

• Growing demand for specialty coffee – coffee consumers had shown an increasing preference for premium coffee over regular coffee and had been willing to pay a high price for premium coffee (p 2)

• Expansion into new product markets and distribution channels: Starbucks Via (instant coffee), Frappuccino bottled coffee for the grocery channel, and providing drive through service had been successful.

Threats

• Increasingly intense competition – domestically and overseas. Between 2000 and 2005, the number of coffee shops in the U.S. increased by 70%. This totaled for approximately one shop for every 14,000 Americans. The company also faced threats from international fast food chains such as McDonalds who also offered premium coffee, only cheaper (p. 3). McDonald's became one of the biggest, and unexpected, competitors when it installed coffee bars in all 14,000 of its US locations (p 3)

• Downsides of Caffeine – Media began stressing the downside of caffeine which potentially caused a decrease in consumption of coffee (p. 2).

• Home Specialty Coffees – The rise in purchases of specialty coffees for use at home was a threat to Starbucks. Starbucks had entered the grocery channel in the 1990’s but so had several other supermarket coffee producers (p. 4).

• Rising coffee bean prices – The average wholesale price for coffee had increased two fold between 2001 and 2010 (p 3)

• Fair trade coffee – The popularity of fair trade coffee had affected the whole coffee industry. Starbucks hesitated in switching to different coffee beans, but after being publicly blamed for its conventional coffee cultivation, which reportedly had involved child labor, the company signed a licensing agreement to sell fair trade, organic and shade-grown coffee. (p 5)

• Global economic recession – After a period of relatively high overall growth (1993 to 2002), the growth of the company slowed to approximately 20% per year (from 2003 to 2008). Finally growth of stores dropped even further in 2009 (p 6)

Root Causal Analysis

Problem #1 – Competition (p 3)

Causes

• Growing market for specialty coffee and an increasing number of coffee shops in the United States

• By 2010, 501 billion cups of coffee were being consumed annually, and retail sales had grown by 6.9% annually to reach $48.2 billion (p. 2).

• Between 1995 and 2008, the percentage of U.S. adults drinking specialty coffee on a daily basis had risen from around 3% to 17% (p. 2).

• Starbucks has no contracts with suppliers. Having contracts with their suppliers could not only guarantee supply, but pricing as well.

• Coffee shops often served specialty coffee and had enjoyed fivefold increase of sales on this product line between 2000 and 2010 (p. 3).

• Between 2000 and 2005, the number of coffee shops in the U.S. increased by 70%, reaching approximately one shop for every 14,000 Americans (p. 3).

• McDonald's

• entry in the specialty coffee sector – offered premium coffee cheaper

• catered to a wider range of demographic segments

• installed coffee bars in all 14,000 US locations

• marketing campaigns emphasized the large cost differential

• Rise in purchases of specialty coffee for use at home. Competing here were big conventional supermarket coffee producers: Procter & Gamble, Nestle, Kraft Foods, and Sara Lee

• Specialty coffee for the home became popular in supermarkets (p. 4).

Problem #2 – Coffee Bean Supply Chain (p 4)

Causes

• the average wholesale price for coffee had increased two fold between 2001 and 2010

• increase in price was due to a constant increase in coffee consumption combined with a shortfall in coffee available for export

• Production in the largest coffee-producing country (Brazil) dropped dramatically in 2004, following a similar dramatic drop for the second largest coffee producer (Vietnam) in 2003.

• Starbucks dependence on its suppliers makes it vulnerable to the same the events as it's’ suppliers such as: inclement weather for crops, political pressures, and economic events that would affect the coffee bean supply.

Problem #3 – Extreme Growth

Causes

• Up until 2007, the global market for specialty coffee continued to grow in size, especially in high and middle income countries (p. 1).

• 70% of the 1000 store closures had been open less than 3 years

• Rapid growth detracted from focus on quality and customer service.

• Starbucks had grown to nearly 17,000 stores in 56 countries from 1996 to 2209 (p. 1).

• Increased competition had blocked Starbucks vision and caused them to put all their focus on expansion rather than customer service (p. 4).

Questions and Assumptions

❖ Did Starbucks resume its international expansion after the global crisis, or has it abandoned rapid expansion in favor of a more customer centric approach in its domestic and already established international markets? (pg. 3)

❖ If Starbucks continues international expansion, will it be using the same strategy, pace, and rhythm as before the economic crisis?

❖ Has Starbucks considered closing certain storefronts in an effort to reduce cannibalizing business between locations in close proximity and reducing operating expenses, thus increasing ROA?

❖ How does Starbucks plan to stay competitive against McDonald’s, who offers a competitive product at a lower price, in the wake of the global recession?

❖ In this case, we will assume that these are impending questions that Starbuck’s must answer when formulating a new business strategy so they can grow their market share, both internationally and domestically, while remaining profitable.

Recommendations

Starbucks saw the increasing market for their product and tried to take advantage of this at the expense of other aspects of their company. This led to an increase in the number of stores, revenues, and market share. It also led to closing many stores and reorganizing Starbuck’s approach to the business. I recommend Starbucks use the incremental decision model to evaluate their current situation and move forward.

The first step of this model is the identification phase. During this phase, the company should recognize the problem and the need to make a decision. This recognition should be made by one or more managers. The problem Starbucks is facing was recognized by the current CEO. He said the company had been too concerned with competitors and had focused on expansion instead of improving customer service. He had recognized the problem and recognized that a decision needed to be made.

The next phase is the development phase. In this phase, a solution is formed to solve the problem identified in the previous phase. Starbucks had to design a custom solution to this problem. Starbucks knew they needed to slow the pace of U.S. store growth and renew its focus on store-level unit economics. The company had never faced a problem like this before so they had to do some trial and error to figure out how to solve this problem. They needed to determine a way to deal with the extreme competition as well as build their name up with their customers again.

The next phase is the selection phase. During this phase, the decision is chosen. They chose to combat the competition problem by launching a cheaper alternative to the market, Starbucks Via, an instant coffee. Starbucks should also consider launching a program for all of its stores to help with the customer service issues. They should train all the store managers and employees in a uniform way to deal with its customers. They could also establish some community outreach programs to build up their reputation with customers again.

Moving forward we also have the following recommendations for Starbucks:

• Mergers and collaboration for expansion proved beneficial in the past. We recommend that Starbucks continue to work with McDonald’s to prevent cannibalization. Green Mountain Coffee Roasters and Starbucks entered into an agreement to supply Starbucks coffee in K-cups for Keurig coffee machines and offered a distribution channel source for US and Canadian markets with expansion into grocery store and home product stores such as Bed Bath and Beyond and Target. Focus on store-level unit economics in US instead of store growth. Improve the service and experience within each existing store instead of focusing on geographic spread.

• Need to explore countries with the highest per capita coffee consumption as points of entry – especially Scandinavian countries.

• Consider penetrating the hospitality markets globally through hotel chains (Marriot, Hilton) which offer in room brewing as well as hospitality counters in the main foyers. Already have a presence in many airport terminal locations and could continue to expand in this way.

• When entering a foreign market, Starbucks' strategy was to retain its core service and product offering as much as possible, while adapting to local demands in the host country (p 5). We think that appreciating the culture of the country that they build in is extremely admirable and recommend that they continue with that respectful behavior.

Excellent suggestions and model application! Just a few things that could have been expanded upon. See my inline comments. Try to leverage all that you have learned in previous chapters in these last assignments. Otherwise, very nice work on this analysis!

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