Starbucks is a long history company in specialty coffee industry, established in 1971 Seattle Washington USA and traded in NASDAQ stock market since 1985 under the symbol “SBUX”, provided beverages – e.g. high quality coffee, tea and light food items through company-owned and licensed stores in domestic market and international market all over the world with strongly focus in differentiate and innovation known by “Starbucks experience” together with Global Responsibility strategy; commitment to communities and employee satisfaction policy complemented in its business strategy (Starbucks, 2009). Starbucks is a fast growing company and played a major role as the leader in specialty coffee industry until in 2006 to 2007, the company growth was starting to declined and turned to negative growth since 2008. While the company was in the bad situation with the global economic crisis and forced by the strong competitors – McDonald’s and Dunkin’ Donut, Howard Schultz had return as CEO (MSNBC, 2008) and tried to transform Starbucks from the struggling period return to innovative and growth again (Howard, 2009).
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In this following report provides analysis of company mission, business strategy with Porter’s Generic Strategies (Michael, 1980), using Michael Porter’s five forces (Michael, 1979) to analyze specialty coffee industry, situation analysis with SWOT, Starbucks core competencies (C.K. & Gary, 1990) and competitive advantage (Michael, 1996) examine by C.K. Prahalad & Gary Hamel method and Michael Porter competitive advantage model. The report includes strategy recommendation by using TOWS matrix in conjunction with SWOT analysis and competitive advantage, and ending with Potential fallout.
“To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.” (Starbucks, 2009) as Starbucks’s recently mission statement. The company has the principles and concerns all stakeholders including their suppliers, employees which recognized as “partners”, customers, communities, shareholders and even environment. Starting from its products themselves (coffee bean, tea, cocoa), they’re passionate to find the finest sources, finest process of products with improving the quality of life of the farmers. With the feeling of partners, all employees treat with respect and pride, also the engagement with customers and sense of human connections by the friendly and warming stores’ atmosphere to earn their royalty and trust, responsibilities and contribution to communities and social, together with one of the important missions is environmental friendly these make them “Starbucks” as a leader for changes and new standards. (Starbucks, 2009)
According to Starbucks mission, their business strategy used is mainly on differentiation focus strategy (Michael, 1980), not the cost leadership strategy, which try to make the different, to be the leader and innovate new standard with their unique products and services that customer could perceived and valued better than others competitors which not easy to be copied or time needed (for some particular periods), as their named it “Starbucks experience” and with quite focus on particular target and market; customers whom share the same valued, required premium-level coffee, have spending ability; young urban professionals, teenage and trendy (Wikinvest, 2010) but not the pricing competition.
Source: Generic Strategies – Michael Porter (1980), http://www.marketingteacher.com
Starbucks’ business strategy (differentiation focus) has been used in all processes and all stakeholders; starting from suppliers and farmers that Starbucks made the different in the way of finding the source of materials (e.g. coffee bean) at the origin places not from the secondary sources and the most significant is tried to improve farmers’ quality of life in the same time also got the good quality of coffee beans. Secondly, they treat the employees differently from the others whom they called partners that hope to make the different in the way of service-minded and relations. Another most important and differentiate point is the global/environment/community responsibilities as their shared value as mention by Howard Schultz, Starbucks’ CEO, said “You don’t do these things for recognition, you do these things because they are the right thing to do” (Nancy, Marya, Katherine, 2008).
As a different industry has different nature of business, competition or level of profitability (productivity and efficiency). So for better understanding in this coffee specialty industry, it could use a framework of Michael Porter, which influenced by the five forces (Michael, 1979).
First, the industry competitors or rivalry among existing firms in the current situation is very high. There are a lot of coffee specially brands and stores offers in the market including independent, local or small-chain coffee house. They are also choose the variety of competition including lower pricing, products differentiate improvement (e.g. taste, technique or quality of services – Caribou coffee) (Nancy et al., 2008), innovative channel or new distribution (e.g. through fast-food chain – McDonalds, Dunkin’ Donut, digital media, social network – Facebook). There are many factors that influenced the rivalry intensity of the industries such as increasing the numbers of specialty coffee stores, declined of market growth so the firms have to fight for market share or expand the market (Starbucks is also faced this factors) with the same demand or fewer buyer and crowding with new entrances (Pascal, 2009).
Next, Threat of Substitutes; the substitute of the products from other industry that can cause by the economic situation or even some new concern issue, for example, health concern (Starbucks, 2009). In economic recession period, the spending and value of customers might be an important concern and with more alternatives they may choose to consume instant coffee at home instead of costly premium-quality coffee from the stores. Also with healthy concern, customer might switch to drink healthier beverage – juice, milk or less/no caffeine drink such as tea, herbal tea.
Third force, Bargaining power of buyer (Buyer power), in this specialty coffee industry customers are powerful because there a lot of alternative choice of stores or others type of beverages to choose with limited scope of market, as not everyone like to drink coffee. It is easy for customer to change from one product to another without difficulty so it’s also low switching cost; one may pass by McCafe’ nearby their working place and get a coffee with meal instead of walk a long way to Starbucks.
Another is Bargaining power of supplier (Supplier power), that most of industry needs raw material, component, others supplies. In this case the most significant supplier for specialty coffeehouse is Coffee bean that is the main cost of the productions following by milk (Starbucks, 2009). And the premium or high-quality coffee bean usually from the specific places or proper agriculture areas so “supplier power” plays important role and has power in this industry so the one who understand and take these into account also can gain the advantage from the others competitor like Starbucks currently does.
At last, new entrance (Barriers to entry) is the barrier or threat to enter to this specialty coffee market. When there are opportunities or increasing in the profit of an industry, we can expect to have new comer to take or those benefit. With the not too (quite low compare to some advance technical expert required industry) expensive start-up cost, it can be seen that this specialty coffee industry is easy to entry or low barrier to entry so for the ones existing in this industry have to concern and find a proper strategy to gain the advantage or create barrier for the new comer.
Starbucks’ Situations and SWOT Analysis
From the specialty coffee industry, it can be seen that this industry has high competition with low barrier for new entrants and customer switching cost to others brand or substitute product is low. So during the previous year Starbucks faced the struggling situation to growth that will explain in the following paragraph.
From the study from Pascal (2009) found that the situation in which Starbucks revenue was rose slowly in 2008 and net profit fell significantly. The growth rate began to be negative the first time in 2008 since 1997. One of the reasons may come from the economy recession that reduced customer spending but in the same period some company such as McDonald’s sale increased which can be assumed that customer finding for most value for the spending from the less income. Secondly, Starbuck strategy of fast store expanding especially in U.S. markets that almost every a corner in the big city had Starbuck store has to find more customer to keep up with new opened store. So in 2008 and Jan 2009, Starbuck had closed around 800 stores in U.S. and 100 stores internationally. Third, another reason was from increased rival in coffee-house business and new competitor from fast food chain restaurant; McDonald and Dunkin’s Donuts that have large number of stores and existing customers provided with varieties value or economy meals and beverages. Even Starbucks tried to provide hot breakfast but finally had to stop by the customers’ complaint of smell detraction from coffee house environment.
According to those situations, it could be use SWOT analysis to study the detail of Starbucks’ situation, challenges and opportunity to overcome those situations.
At first, the Strengths, it can be seen that Starbucks has a strong brand name and good brand reputation (Nancy et al., 2008), Strong visionary leadership of currently CEO, Mr. Howard Schultz with experienced management team (Starbucks, 2009), Expertise and know-how in coffee house business, Well-training systems and engagement from partners (employees) and large number of distribution stores. Especially they have their own exclusive sources of coffee beans with experienced and expert team to prove the quality of materials in conjunction with researchers to improve the quality of coffee bean. In addition Starbucks has strong financial situation as can be seen from the cash flow and the increasing of dividend which will be paid in August this year (2010) (The New York Times, 2010).
Secondly, the Weaknesses, Starbucks branded itself as a premium coffee for premium customers, trendy, young and teenage that limits the scope of the markets or loses the new potential customers (Wikinvest, 2010). Because of Starbucks has experienced management and has long term relation with the company, the loss of high level management can affect the current operation and strategy plan (Starbucks, 2009). Another point is that Starbucks is a fast-growing and successful company in the past decade so this make Starbucks complacent (Howard, 2009) making the company not creating new innovations in coffee business. Next weak point is that currently, there are higher turnover rate of partners (employees) that some caused by company restructuring and others by the heavier load in the stores, less connection or relation between managements and partners also causing by the fast expansion and the large number of partners (Nancy et al., 2008). Additional, Starbucks has high cost of productions especially for the coffee bean that normally 15% higher than the market price (Nancy et al., 2008) to maintain the business strategy which aim to improve quality of farmers or workers life- fair wages and research and development for the best quality of coffee beans. Furthermore, there is not too nimble to make decision and execution together with struggling in the business strategy so there are lacks of new distribution channels, partners and networks.
Third, Opportunities: There is the growth trend of specialty coffee as the demand of more people drinking coffee and the trend of flavor to have a coffee at coffee house (Vending market watch, 2008). There are International market gap that still available to fulfill the demand of coffee drinking, especially in the emerging country like Russia, India and China (The Seattle Time, 2010). Another good sign is that the economic recession seems to be at the lowest point and starting to recovered (Jeremy, 2010). And with the new technology arrival, Starbucks can improve IT system from back-end processes that can provide faster and précising information helping management to react or make immediate decision to the market situations and competitors including using IT to improve the supply chain management, factory/warehouse automation or even the operation processes at the stores to improvement customer ordering process such as billing and information gathering to expand customers network and distribute information through digital media and social network like Facebook or iPhone Apple online store (Starbucks, 2009). Additional condition of the global warming and climate change situation has bring the social concern and that can make more reputations to the Starbucks as the leader in environment friendly which is one of their mission and business strategy.
Forth, Threats: The economic crisis and recession change the way of consuming and spending of customers (Pascal, 2009) and also high rivalry in the coffee house industries in which the competitors can provide similar products and services with difference values and strategies like fast-food chain restaurant such as McDonalds and Dunkin’ Donut in addition with new entrances which have expertise of coffee brew or experienced barista in the local brand stores. Another threat is the new technology of automatic coffee machine that can provide similar quality or taste with cost competitive and convenience as the coffee house provided. One of the most important threat is the Demographic changes which the reduce of the growth rate in number of young and teenage compare the baby boomer ages that become more and more (Wikinvest, 2010) that are not Starbucks’ target market and not match with their strategy. The last threat may include the concern of the health of the people to drink coffee that has caffeine, lots of sugar and fat and this issue can become the significant threat of customers switching to the substitute more healthy products.
Core competencies and competitive advantage
As the core competencies are the source of competitive advantage and they are lead to the development of products and services (C.K. & Garry, 1990).
Source: The Core Competence of the Corporation by C.K. Prahalad and Gary Hamel
Starbucks’s Core Competencies:
From the diagram above, Starbucks uses one of its competency (e.g. expert and passionate to find the finest source of raw material) to build their core product (Coffee bean) that did not sale directly to the customers but they use it to create a large numbers of end products. It can be explored more detail of Starbucks core competencies such as:
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From Nancy et al. found, it can be seen that, Starbucks develop their own competency on the expertise of coffee bean selection that difficult for the competitor to copied by use their passion to find out the source of great coffee bean also with the mind of differentiate and innovation, they keep researching and developing the process to improve the way of agriculture and transfer the knowledge to the contracted farmers or worker with long-term relationship using the principle of fair wages and improving the quality of their life together with community engagement. Also with the knowledge and research & development in roasting technology in their factory make them expertise in coffee bean roasting process as another competency, these make Starbucks own unique premium quality coffee beans as their first core product.
From this point, Starbuck distribute this core product to different business to create varies end products; one of the business unit is Global Consumer Product Group (CPG) that responsible for the different products type of packaged coffee. Another business unit, foodservice, will distribute the coffee bean to Starbucks stores to make many type of coffee beverage drink; Cappuccino, Late, etc. (Starbucks, 2009)
Additional competency that we can extract from Starbucks is their expertise in management and leadership with ethical to transfer and make all stakeholders shared the same values which include partner (employees), supplier, communities or public and customers. Some of the values are global responsibility, fair trade certified, environment friendly, engagement of partners with customer in personal level and engagement of the firm to communities. From this competency they got Starbucks’ brand itself as another core products. These core competency can be distribute to different business units and provide others the end products such as “Starbucks coffee machine”, “Souvenir-Mug, Cup, Cap, T-shirt, etc.” or even “CDs, music and books” in the name of Starbuck’s selections. And it can be seen that these kinds of the products also generate good revenues to the company.
Starbucks’ competitive advantage
These can be used Michael Porter Competitive advantage (Michael, 1996) to analyze Starbucks’ competitive advantage that he categorized into two type; Cost advantage and Differentiation. It can be seen that Starbucks position itself in differential advantage and use it as their business strategy to create competitive advantages. The detail explanation will be shown in following paragraph.
Source: Competitive Advantage, Strategic Management from http://www.quickmba.com
As diagram above, in order to develop competitive advantage the firm must to have resource and capabilities – know to utilize the resource in efficiency way, in this case Starbucks has superior resources than others competitors as mentioned in their core competency, they have strong brand and firm reputation, knowledge or expertise in specialty coffee process and business including royalty and good networking in the value chain – suppliers, licensed stores and customers that not easy or very few competitor and gain similar resources. With the capabilities to utilize or bring their products and services to the market faster than competitors, those make them has the distinctive competencies (QuickMBA, n.d.). Compare to a competitor like Caribou Coffee which has fewer resources – fewer stores network (less than 5% of Starbucks) (Wikinvest, 2010) and less capabilities (slower expansion stores growth rate) to bring products or innovation to the market.
While compared to the potential competitor such as McDonald that has good similar resources, brand reputation in food-services and with more stores networks than Starbucks but there still some resources (know-how of coffee brew and coffee bean) Starbucks has more superior than McDonald. Even McDonald has almost the same capabilities to use those resources but they choose to use cost advantage as their strategy that opposite with Starbucks. Combining with the value that Starbucks created in the value chain system (upstream value created with suppliers, social and downstream to customer) that perceived by the customer has overall more value and differentiate than McDonald.
Currently, most of Starbucks strategy are tried to create differentiate and tried to use Blue Ocean Strategy with pursuit differentiation and cost advantage (low-cost) in the same time (W. Chan & Renee, 2004). So from the SWOT (TOWS) analysis in section 5 above, strategy recommendation might be developed using TOWS Matrix (Heinz, n.d.) as
Source: The TOWS Matrix — A tool for Situation Analysis, Heinz Weihrich, University of San Francisco
First, as the opportunities in the growth of coffee drinking markets, Starbucks could use their strength in Brand reputation to build more brand awareness to new potential customers by using various type of medias include digital media especially in social network that might increase stronger network and royalty, in which Starbucks currently does it (Willis, 2010) but these would cover only the target which customers involving in the social network such as teenage and young adult so they should expand more target market to ones who still use the traditional way of media including TV, Magazines or Sport or communities activities. Also create more social responsibility activities and interaction between customers and the company.
Another opportunities is to fulfill in international market that compare to the current ratio of domestic stores in U.S. (11,128) and international stores (5,507) that only a half compare inly in U.S market (Starbucks, 2009). As their strength in knowledge and experience in Specialty Coffee industry, strong management – training procedure and financial situation, they should focus more in international expansion, finding local experienced partner that understanding and knowledgeable in customers in that local market.
Additional strategy recommended is using Maxi-Mini which utilize strengths to minimize threats is that, as they are strong in Brand, knowledge to find the own sources of coffee bean and strong financial position by using cost advantage strategy in this economic recession, Starbucks may create additional second brand which they are started to have another brand named “Seattle’s Best Coffee” (Starbucks, 2010) distribute to different channel such their new fast food chain partner, Burger King, to compete and try to get additional market share in this sectors also create a barrier for the new local coffee brew to entrance to this industry too. And as their strength in quality coffee bean, Starbucks may create more varieties products to serves new target market to minimize the change of demographic situation that more senior citizen or baby boomer ages that have different value and life style these products may include premium quality coffee bean packages and Starbucks automatic brew coffee machine which they can make their own high quality at home and new distribution channel (not only sell in Starbucks stores) such as discount stores to supply instant soluble coffee and packaged coffees bean, even Starbucks already had this kind of products such as VIA, TAZO (Starbuck, 2010) but in the target market and focus still so strong to aim at this population changed as we’re not easily see those products in currently situation.
One more strategies to minimize the weakness by take advantage of the opportunities that are: first, even Starbucks has faced the drop in revenue growth during economic recession but there are opportunities for them to improve their business to be more productivity using new opportunities in new IT system technology that can help them to improve customer satisfaction in the process of the stores, ordering, billing and customer feedback also provide fast and precise information for manager to make decision such as additional partners (employees) in peak period or in crowded stores by those technology include semi-automatic coffee brew machine to reduce overload task of employee that can improve partners satisfaction and reduce turnover rate. Also free WIFI-internet available (Rick, 2010) for customer while waiting and crate new attraction for customers to spend frequently time at Starbucks.
Another strategy recommends minimizing weakness and avoiding threat, which Starbucks has experienced and good management team as their strength also it’s the weakness of them if they are lost good management team, so to minimize this effect of management turnover, they have to make sure that they have prepared successors or executive trainees to be ready to take in charge. To minimize partners (employees) turn over caused by over loaded task at store, they have to improve employees’ satisfaction, proper workload, improved skilled by provide well-training course, valued creation and attractive benefits. In the same time, avoiding some threats such as customers’ health concerned by provide more choice in healthy options like Low-sugar, Sugar-free, low-fat, decaffeinate on beverages and snacks/meals. An another important threat is the changed in demographic of Higher number of seniors and reduced number of teenage or adults that can overcome by prepared additional or wider range of products and services to match with their life style such as more healthy drinks- fruit juice, high-calcium milk product beverages and warm friendly (not too trendy) classical with senior facilities-easy accessible comfortable chair/table at stores.
According to the suggestions and solutions in which some of them are using different business strategy and competitive strategy (Michael P., 1980); Differentiate and Cost advantage, in the same time and same industry may create conflict each other or create others issue (Constantinosc & Daniel, 2010) or even bring the company to “get stuck in the middle” (Michael P., 1996) so Starbucks has to concern some of this consequence that could go wrong and make problems in the future such as:
As the recommended strategy they might have more distribution channels (Stores, discount/convenience store, second brand – Seattle’s best and fast-food chain restaurants), variety of products (In-store, Ready-to-Drink, Soluble, packaged bean and meals) and different type of international expansion (Starbucks’ own stores, Licensing and franchising). One issue that may occur is the Channel conflict which cause by the new way of provided products and services or over productions or product substitutions such as less consume at store increasing soluble and packaged coffee bean make at home might that may drop the demand of in the store and rising the coffee sale in discount store that harm some of channels. Increasing sale through fast-food chain restaurant such as Burger King and Subway (Carol, 2010) but reduce revenue from the Starbucks’s own stores or even decreasing the partner (licensed/Franchise) relationship.
More than that the recommendation strategy to make new innovation, differentiation by create more Social/global responsibility, research and development, suppliers and partner satisfaction and used of new technology as customer satisfaction are more costly to the production and with the concern of cost advantage for simultaneous use of differentiation and low cost (W.Chan & Renee, 2004) to create more value to customer, efficiency and stretch all the resources are important and some of them may lose from this process that may damage brand reputation or even lost the value or culture of the company (Constantinos & Daniel, 2010).
At last, as the current situation in August, 2010 of Starbucks leading by Mr. Howard Schultz, it seems that Starbucks has got back into the track which has the positive growth in both sales and profits (The New York Times, 2010) and will have new innovation products and services launched in sooner days.
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