CASE STUDY:



Growth in Saturated and Mature Industries

Case analysis

Presented to the Department of Management

Lesson 9 Case #1: Starbucks, Inc.

By iNom (Radionell)

GRBA 853 Strategic Management & Business Policy

Professor Digman

November 29, 2007

Starbucks, Inc.

Background

Vision/Mission The vision/mission of Starbucks is that to be "the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.” The mission reveals their vision that Starbucks wants to improve the quality of living by providing gourmet coffee to customers which was hardly attainable due to extremely high price for the majority of people. In addition, Starbucks announces six guiding principles to help measure the appropriateness of their decisions as follows:

1. Provide a great work environment and treat each other with respect and dignity.

2. Embrace diversity as an essential component in the way we do business.

3. Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee.

4. Develop enthusiastically satisfied customers all of the time.

5. Contribute positively to our communities and our environment.

6. Recognize that profitability is essential to our future success.

Also, the Company announces that “Starbucks is committed to a role of environmental leadership in all facets of our business” as their environmental mission statement, and guiding principles for it as follows:

• Understanding of environmental issues and sharing information with our partners.

• Developing innovative and flexible solutions to bring about change.

• Striving to buy, sell and use environmentally friendly products.

• Recognizing that fiscal responsibility is essential to our environmental future.

• Instilling environmental responsibility as a corporate value.

• Measuring and monitoring our progress for each project.

• Encouraging all partners to share in our mission.

All in all, the company aspires to be at the leading edge in specialty coffee café industry in terms of the satisfaction of all coffee lovers, shareholders, employees, customers, and communities.

Goals/Objectives The Company’s objective is “to establish Starbucks as the most recognized and respected brand in the world,” and it is well aligned with its vision and mission. To make more people can enjoy its premium coffee with affordable price; Starbucks tries continuously to obtain quality coffee beans and to expand its stores. Also, the company keeps maintaining its philosophy for the environment to be the “respected brand.” As the evidence of its goals and objectives, Starbucks currently provide its products and services in almost all states in the U.S. and 41 different countries, and the company plans to further expand its operations.

Strategies

Management developed a strategy for Starbucks “to continue to rapidly expand its retail operations, grow its specialty in sales and other operations, and selectively pursue opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels.” To maintain the largest market share in specialty coffee café industry, Starbucks is trying to continuously improve its products and services, efficiency in corporate governance and management, and brand.

In a nutshell, Starbucks’ current strategies focus on ways to develop an effective differentiating enterprise-wide strategy, to retain quality employees with unique benefits such as Bean Stock, to increase customers’ awareness for its specialty coffees and other products, to keep its brand image strong and healthy, to make appropriate and well-timed investment when expanding its stores in domestic and international areas, to achieve operational excellence, and to increase revenue.

Based on these strategies, Starbucks will concentrate on new opportunity of growing strengths and capability to excel competition.

Situation Analysis

Internal: Resources, Competencies, and Advantages

Starbucks is the largest specialty coffee company and the leader of specialty coffee café industry of the world. The company accomplished “58 percent net revenue growth, operating margin improvement of more than 100 basis points, and earnings per share growth of over 70 percent over the last two fiscal years, in 2003 and 2004.” For the fiscal year of 2003, “net revenues increased 23.9 percent to $4.1 billion from $3.3 billion.”

Resources: The Company has several resources to deliver unique ‘Starbucks experience’ to customers. At first, Starbucks has an ample financial resource. It had “$350 million in cash and cash equivalents and short-term investments at the end of fiscal 2003, and total cash and cash equivalents and liquid investments increased by $158.8 million during fiscal 2003 to $486.2 million.” Compared to major competitors, Starbucks is financially very sound, and the company can use its available cash resources to compete against the competitors. Also the company has strong global alliances, many stores (6,566 company-operated stores and 3,729 licensed stores in the U.S. and 1,613 company-operated, 2,488 joint venture or licensed stores in 41 countries, as of August 2007), and quality workers compared to the competitors largely due to superior employee benefits. Moreover, it has a wide range of products including more than 30 blends and single-origin coffees, handcrafted beverages, merchandise (home espresso machines, premium chocolate, coffee mugs and others), food and snacks, and even music, books and film. All these resources allow Starbucks to provide unique and quite differentiated services to customers.

Competencies: Starbucks has a variety of competencies that set them apart. At first, Starbucks acquires lots of specialty coffee beans without “middle man.” It allows to the company provide its premium coffee for very competitive price. Secondly, the company’s partner (employee) is, on average, more passive, professional, and sincere to customers because Starbucks’ comprehensive benefits package is unique and superior that other companies in the industry. These well-trained and retained partners make Starbucks very distinctive from competitors because the good relationship between baristas and customers is critical in this business. (In other words, happy employees make customer happy; hence loyal.) Thirdly, the capability of building a good relationship with farmers, business partners (especially global alliance partners and licensing partners) is another distinctive competency of the company. Lastly, Starbucks has a competence in developing and introducing a new product, such as “New Age” coffee. These factors all make the company very competitive in this industry.

Advantages: Starbucks is the market leader in this industry. The fact allows the company enjoys some privileges. For example, strong brand image and recognition largely due to the market leader position gives the company the advantage of having more opportunities of alliance or licensing. Secondly, its well-established distribution and sales channel with the huge number stores allows the company enjoys the advantage of “economies of scale.” Also, a variety of products Starbucks has developed gives the company the advantage of “economies of scope.”

Strengths

There are several strengths that Starbucks can use to maintain its strong position in this saturated market, but there are also some weaknesses that it must improve in order to remain competitive. The company’s strengths can be summarized as follows:

• Having lots of stores in strategic areas

• Quality products and workers

• Strong brand image and recognition

• The ability of brand leveraging with partners (such as Barnes & Noble)

• Having a wide range of products

• The capability to deal with environmental issues and criticism

• Financial resources

• Good capability of sourcing and managing supply chain

• Well-established distribution channels

• Agile and proactive to changing trend and preference of customers

Weaknesses

Although Starbucks is a market leader in specialty coffee café industry, it has several weaknesses and the weaknesses are must be eliminated or reduced.

The weaknesses include:

• Relatively slow in terms of speed of service

• Too much reliant on coffee and coffee-related product

• Limited variety in brewing machine products

• Too many stores in same areas (‘the market saturation strategy’ is two-sided-sword because it could eliminate “uniqueness” while increasing revenue.)

Critical Success Factors

There are several critical success factors for a company in this industry. Those are:

1. The ability to occupy strategic locations

2. The ability to offer high quality and a wide-line of products including coffee beverages, coffees, brewing equipment, and pastries and snacks.

3. Having a strong brand image and reputation

4. The ability to introduce new and high quality products

5. Having a good relationship with partners and suppliers

6. Having and retaining a well-trained and knowledgeable staff

7. Having a core product or unique theme such as unique surroundings, social or comfortable atmosphere, and the place-like experience

8. Having ample financial resources to expand retail stores and to procure the coffee beans

9. Having the ability to identify the change of trend and customer preference

The most important CSFs are the ability to occupy strategic locations which is closely related to healthy financial status of a company and having a strong brand image. Because the industry is nearly saturated and characterized by fierce competition these two factors play critical role in the specialty coffee café industry.

External: Trends, Issues, major competitors, and Competitive Forces

Trends: There are several external trends, issues, and forces that Starbucks must consider in order to remain competitive.

(1) Positive trend for Starbucks

• Increasing the popularity of eating out

• Rise in single-parent and dual-income households (more time-pressured lifestyle)

• Growth in disposable household income (a decline in the price difference between dining out and cooking at home)

• More favorable exchange rates due to weaker (the depreciation in) US dollar

• A growing number of “dual drinkers”

• Increasing demand for “New Age” coffees (or ethnic coffees) and flavored coffees

(2) Neutral or Negative trend for Starbucks

• Increasing demand for technology in a restaurant, such as wireless Internet excess

• Demographic change in both workers and customers

• Wellbeing or increasing concern for health

Issues: Current major issue of the industry is the social, economic, and environmental issues or criticism concerning the production of coffee, farmers and their country. The issues are critical because it would force the group of people take movement against the company, such as backlash and boycott movement. Therefore, these issues should be thoroughly forecasted and scanned before it severely affects the company.

Competitive Forces: Using Porter's Five Forces Model, the specialty coffee café industry can be summed up as:

Threat of New Entrants – Medium to High: Virtually, there is no barrier to start the coffee business except for financial requirement, especially for individual or small business. However, considering national level competition in the industry, it is Low because there are strong barriers such as the requirement of huge financial resources to obtain strategic locations and quality coffee beans, brand image and recognition, etc.

Rivalry among Existing Firms – High: Competition is fierce, specifically in national level. Major competitors, including Diedrich Coffee Incorporated, Green Mountain Coffee, and Tully’s Coffee Company offer very competitive products and services. Moreover, the competition comes not only from the specialty coffee café industry but also from the major players of other segment in restaurant industry, such as McDonalds or Dunkin Donut. However, in some rural areas or local places, the rivalry is low to medium. So it can be said that the rivalry depends on the location of a retail outlet.

Bargaining Power of Customers – Low: although customers’ bargaining power can be increased when they form a group especially to criticize the company’s particular problem such as environmental issue, their bargaining power as an individual is low when it comes to bargain for the product or the price of product.

Bargaining Power of Suppliers – Low to medium: Majority of specialty coffee beans are produced by small farmers and their bargaining power to Starbucks is quite low. However, as a group or country, such as the group of large farmers or Ethiopia and Columbia, their bargaining power increases.

Threat of Substitutes – High: Including competitors’ products, there are so many substitutes such as soda, tea, energy drink, bottled water, juice, and others.

All in all, the specialty coffee café industry is a classic mature market which is characterized by stiff competition and low profit margins.

Opportunities

The opportunities available to the company are the following:

• The increasing demand for ethnic coffees largely due to the fast growth in Hispanic population in the U.S.

• The increasing demand for flavored coffees

• The opportunity for global expansion of business is also increasing concerning the growth in personal income level in foreign countries. (The increasing opportunity for global alliance and licensing)

• The acquisition of firms which provide unique services or other products, such as yogurt.

Threats

The threats to the company are the following:

• Growing concern of social, economical, and environmental issue concerning the production of coffee and farmers

• Entrants of new / innovative competitors with customized and specialized coffee product

• Major competitors’ (both in this industry and from other segment in restaurant industry such as McDonalds) increased focus on specialty coffee business

• Declining demand for coffee products compared to other beverages with regard to demographic change and ‘well-being’ trend in the U.S.

Alternatives and Analysis

An array of options may exist for Starbucks, including the following:

• Focus on expanding retail outlets in new neighborhoods in established regions.

• Focus on diversifying into other beverages or products.

• Focus on expanding globally by joint venture and licensing.

|1. |Focus on expanding retail outlets in new neighborhoods in established regions. It is a winning formula that had been proven by the |

| |success of Starbucks. The company’s so-called ‘market saturation strategy’ has been worked very well. The benefit of this alternative is |

| |that it allows Starbucks “to saturate the market before their competitors making it difficult for them to enter” and to remain a dominant|

| |force in the industry. It allows the company to keep focusing on doing what it does best and “to increase the customer base, which would |

| |increase profits through increased market share.” The alternative is feasible because the company has strength in (1) its ability to |

| |choose and occupy strategic locations, (2) having a strong brand image and recognition, (3) financial resources, and (4) the capability |

| |of choosing right partners for joint venture or licensing. This alternative could win against the competition because (1) Starbucks is |

| |the segment leader in market share and it has the ample financial resources and strong brand, (2) major competitors, especially |

| |“Diedrichs Inc. and Tully’s do not have the financial capabilities to increase the number of retail outlets.” There are several drawbacks|

| |to this alternative. At first Starbucks might be lost an opportunity of gaining new domestic and global market share. Secondly, the fact |

| |of too reliant on coffee products in concentrated areas grows the risk from the lack of diversification. Lastly, “Starbucks could |

| |actually run the risk of lessening its brand image by stretching itself too far in concentrated areas. Ways around these drawbacks would |

| |be (1) to continually introduce new innovative products and “to utilize previously existing agreements in areas such as in the |

| |ready-to-drink market in order to penetrate new markets and gain name recognition giving the company an edge for future café expansion.” |

|2. |Focus on diversifying into other beverages or products. The benefit to this alternative is that Starbucks could reduce the risk of not |

| |having a wide range of products. Although the company has a variety of products, they are too much related to coffee. Therefore, the |

| |alternative would allow the company to build a sound business portfolio in terms of more various categories of products. The alternative |

| |is feasible because (1) Starbucks has enough financial resources to develop other products or to acquire firms which provide other high |

| |quality beverage products (2) the company’s distribution and sales channel is already well established, and (3) It can use existing |

| |partnerships and alliances to leverage new products. In order to win against competition, Starbucks should use its superior brand name |

| |and recognition to promote new products. Also, the company should make the products as upscale as the current products to maintain its |

| |brand image of premium coffee purveyor. The drawback to this alternative is the risk of not focusing much on its distinctive competence |

| |and the risk of potential administrative inefficiencies from new division which is managing new products. Also the company would require |

| |a large capital investment in developing or acquiring new products or firms, respectively. A Way around this drawback would be for |

| |Starbucks to benchmark the best practice of restructuring a company’s structure and to put necessary administrative effort to make this |

| |change smoother. |

| | |

|3. |Focus on expanding globally by joint venture and licensing. The specialty coffee café industry overseas is not as saturated as in the |

| |U.S. The benefit to this alternative is that Starbucks might be able to establish its brand name and acceptance in important emerging |

| |markets, such as China and increase profit. In other words, Starbucks can access to a huge new customer base and capture market share on |

| |an international level. Also, it allows Starbucks to diversify risks by building international business portfolios. The alternative is |

| |feasible because the company already has substantial retail outlets overseas and has obtained many experiences for dealing alliances or |

| |licensing with foreign companies. Also it has strength in brand recognition, international popularity, and financial flexibility. This |

| |alternative would win against the competition because (1) major competitors have not enough financial resources to compete against |

| |Starbucks overseas, (2) Starbucks might be able to bring its worldwide brand image to leverage its new products in domestic. The major |

| |drawback to this alternative is that the company would lose some of focus on domestic market, and the establishing partnerships with |

| |foreign firms is risky in terms of political, social, cultural difference and exchange rate risk and others. Also, the share of profits |

| |from the international cafes is lower than the domestic cafes. Ways around this drawback would be “to expand into minimum risk areas at |

| |first and to increase the equity and eventually open company-owned retail cafes.” |

| | |

Recommendations

Select the combination of Alternative 2 and 3, with more focus on Alternative 3. Starbucks should focus on global expansion using its superior brand and distinctive competences while ceaselessly trying to diversify its products. The company will maintain its competitive edge against major competitors by adding upscale products, such as premium chocolate, ice cream, and yogurt in domestic market while further increasing gap in international market. The company will also preoccupy a strategic position in important emerging markets such as China, India, and countries in Eastern Europe. By doing so, the profit and market share of Starbucks in the industry will be increased. In addition, the company will be able to decrease current risk of not well-diversified products. This hedging is critical to the company concerning the current trend of well-being and demographic change. Moreover, Starbucks’ brand image, reputation, and international popularity will be further increased because of expanded market presence. In short, the alternative provides the most potential for growth and profitability in this saturated industry based on the expected state of the future business environment, and will allow Starbucks to increase its leadership in the industry.

Implementation

For successful implementation of this alternative, Starbucks should develop a set of objectives to minimize and control possible risks or setbacks of expanding into international markets.

1. Starbucks should thoroughly investigate advantages and disadvantages of investment in potential countries in emerging markets.

2. When it comes to the expansion, the company should invest minimum risk areas at first with minimum share of the equity, and then gradually increase the share and the operations into the neighborhoods areas.

3. The company should adjust its administrative structure with regard to the expansion.

4. Starbucks should utilize existing agreements in areas such as in the ready-to-drink market in order to leverage new products and gain name recognition in new markets.

5. Starbucks should develop new distribution channel such as using vending machines for the ready-to-drink products and new products.

6. While managing the retail outlets overseas, the company should maintain its best practices such as superior employee benefits to obtain favorable brand recognition as well as a quality workforce.

Contingency plans

Management should develop contingency plans to protect the company from possible unfavorable events.

• What if there is a severe backlash or boycott movement with regard to the social, economical, and environmental criticism? Starbucks should clearly explain customers the exact information about the issue. Also, the company proactively uses all possible media to protect brand image. If possible, Starbucks should prevent this event in advance. If not, the company must react very promptly to minimize the damages from the movements.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download