Strategic Management and Business Policy, Case Study Example

Abstract

Starbucks is obviously one of the biggest beverage companies in the world today. Key to Starbucks’s successful strategy is to actively listen to, interact with, and act on the expectations of its customers, who possess a strong environmental and social conscience, and to constantly demonstrate reductions in the environmental footprint of its operations. As such, this paper gives a strategic viewpoint regarding the environmental impacts of Starbucks. The strategies of Starbucks to distribute coffee, such as through coffee stores, grocery markets, and new retail channels, as well as their benefits and consequences are studied. Price is about what will charge customers for products and services. This paper discusses how pricing scheme should consider profit margins and the possible pricing response from competitors. The integration of various internal and external factors is best revealed through SWOT analysis, which provides a simple overview of Starbuck’s future strategic situation. And finally, it is recommended that the research encompass the multiple media channels and target markets in relationship to the campaign objectives previously outlined by examining what percentage of the media budget is spent on the media vehicle and the resulting analysis of the data to reveal what avenue produces the greatest brand awareness.

 

Table of Contents

Abstract 2

Introduction. 4

Size and Growth of Market 4

Competition in Market 5

SWOT Analysis. 6

Pricing Methodology. 10

Financials (Sales and Margins) 11

Recommendations and Conclusion. 13

 

 

Introduction

Starbucks, as one of the ruling kings in the entire coffee industry, is now everywhere. It sells not only its coffee; it sells the “Starbucks’ experience” away from home and away from work. From a retailer and roaster of coffee beans in Seattle, Starbucks is now a world-renowned organization that provides the best coffee choices for the market. Today, the business also has managed to establish several retail branches around the world. Due to this, the possibility of creating different choices and different coffee tastes has also been given birth. Towards the future, it is foreseen that adjustment on the making of coffee based on the coffee culture of the people living within the area where the retail stores and international shops of the business are located. As Shariff and Abington (2012) point out, Starbucks strategic objectives for 20112 -2014, should be tied to its mission statement which is concerned with the maintenance of the most strategic and respected brand in the world, can be achieved by a collective effort, in which all major players and stakeholders are made to pull the same rope at the same time in the same direction.

Size and Growth of Market

Starbucks is now powerhouse premium brand in a category in which only cheaper commodity products once existed. As of July 28, 2011, some 40 million customers a week flock to its nearly 17,018 company-oriented and licensed stores in 50 countries (Andrejczak, 2011). Starbucks achieves remarkable revenue growth more than 20 per cent per year. Starbucks’s triumph has drawn a full litter of impressionists, from direct players such as Caribou Coffee to fast-food merchants (such as McDonald’s) and even discounters (Kicks Coffee Café at a Wal-Mart) (Andrejczak, 2011). Nowadays it looks like that every person is selling their own product of premium coffee. In the early 1990s, there were only two hundred coffeehouses in the United States. Today there are more than 1,000 within the US only (Andrejczak, 2011). To continue its extraordinary growth in an ever more over-caffeinated market, Starbucks has brewed up a determined, multipronged strategy of growth.

In order to maintain a healthy sales volume and growth track record from 2012-2014, Starbucks must recognize that the competition is here to stay throughout the world. In countries such as Vietnam, the opportunities for Starbucks to thrive are substantial, but the competition is just around the corner. McDonalds has been in existence much longer than Starbucks, and also has a clearly recognizable and popular brand image. It is not surprising that the fast food giant, experiencing some troubles of its own, is one of the most important threats to Starbucks’s well being and overall growth strategy.

Competition in Market

Starbucks faces tremendous competition in some retail markets throughout the world.  Many retailers have developed coffees and specialty drinks that offer a similar experience to Starbucks and consumers have jumped on the bandwagon.  For example, Dunkin Donuts, a U.S. donut retailer, has expanded its coffee product line to include gourmet coffees for home use, as well as a wide variety of specialty drinks (Vinzant, 2007).  McDonalds has also entered the gourmet coffee market, with its premium and iced coffee products at lower prices than what Starbucks offers. Finally, Panera Bread retailers have established a winning strategy with their line of gourmet bagels and pastries, soups, and sandwiches, coupled with premium coffee products (Vinzant, 2007).

As many fast food restaurant retailers expand their gourmet coffee product offerings, Starbucks has taken notice.  Pirko (2008) states the following: “When McDonald’s and Dunkin Donuts become yours competitors, and it brings you down to more into the commercial world — and their price really matters”. In this context, many consumers have reduced their consumption of the more expensive specialty coffee drinks in favor of lower-priced coffees at other retailers, such as Dunkin Donuts and McDonalds (Pirko, 2008).  As a result, Starbucks has observed a decline in growth and stagnant sales, as consumers must spend their incomes wisely on such necessities as their mortgages, gas, and basic food supplies (Pirko, 2008). There are important implications of the current economic marketplace for Starbucks, and the competition plays a substantial role in these consequences.

SWOT Analysis

 

Moore and Gooderl (2008, p. 80) state that a solid foundation for competitive advantage requires a match between the strengths and weaknesses of a business and current opportunities and strengths. This integration of various internal and external factors is best revealed through analysis of strengths and weaknesses, which provides a simple overview of Starbuck’s strategic situation.

Strengths: As Starbucks has gained tremendous ground on the competition with its fierce entrance into the world marketplace, its retail store model has been successful in many countries throughout the world, and the emphasis placed upon gourmet coffees and specialty drinks has been well accepted by world consumers. In many ways, Starbucks has established a proven strategic formula that has forever transformed the ways in which consumers view the coffee business and the beverage as a whole (UW Business School, 2003).  Most importantly, Starbucks’ revenue and growth strategy surpasses all of the competition, and its objectives to expand into new foreign markets have been triumphant.  Starbucks’ primary entrance strategy to surround new markets until they are saturated has been tremendously advantageous for the business and its employees.  Finally, Starbucks clustering strategy, whereby a number of retailers might be observed within blocks of each other has attracted consumers in large numbers.

Weaknesses: Starbucks has been observed as a strong supporter of innovation and new product development; however, some of these products have been less successful than anticipated, which introduces a level of vulnerability for the corporation and its objectives.  Furthermore, despite ever-increasing expansion into new markets, Starbucks continues to focus much of its attention on the United States, where it is headquartered, and this may lead to future problems related to business longevity and success (Fellner, 2008). If the type of emphasis placed upon the United States was introduced into foreign markets, new opportunities could emerge. Nonetheless, Starbucks remains vulnerable to external competition and threats from lower cost coffee retailers with similar product offerings.  Finally, Starbucks has witnessed a number of store closures in the recent past, due in large part to its retail saturation strategy.  In essence, some of these retailers have not generated sufficient sales growth to remain in operation successfully (Fellner, 2008).  Therefore, a loss of revenue has been observed in these retail stores, which has placed a burden on the corporation and its revenue stream.

Opportunities: Starbucks continues to expand its horizons in both world and domestic markets, offering many different coffee products at different periods, including seasonal specials and new ground coffees.  High revenue growth expected from proposed opening of 500 new stores in 2011 and beyond. Excellent growth potential predicted for Starbucks Blonde roast, which is a new roast profile that has been added to the company 40 year heritages (Starbucks Newsroom, 2011). Forty percent of US coffee consumers have strong preference for lighter roast, which will facilitate rapid take off of Starbuck Blonde Roast. Reliable consumers trust in company’s brand for delivering quality from its 80 variations of taste. The company is well-positioned to exploit consumer behavioral patterns towards coffee. According to Jeff Hansberry, President of Chanel Development for Starbucks, customers spends 60 seconds in the company coffee aisle to make a decision base on taste and intensity (Starbuck Newsroom, 2011).

These products have become popular during such holidays as Thanksgiving and Christmas to accompany the holiday spirit.  Starbucks also represents itself widely in many social causes and initiatives, including its Fair Trade line of coffee products (Fellner, 2008).  Starbucks has been achieving significant cost reductions from the use of green buildings, energy and water conservation and is poised to achieve 100% recycling and re-use of coffee cups by 2015. As the organization continues to expand its foreign retail outlets, the business looks to such foreign markets as China and Japan to integrate its brand reputation and image into the existing market landscape. Finally, Starbucks has expanded its brand name through a number of co-branding strategies with other manufacturers as a means of promoting sales growth and longevity throughout the world (Fellner, 2008).  These opportunities enable the business to expand upon brand growth and to determine the most effective means by which the business will continue to grow and prosper.

Threats: Despite its strong saturation strategy, Starbucks has experienced a number of threats from the competition, including those brands that sell similar products at competitive prices, including Dunkin Donuts and Seattle’s Best Coffee.  This demonstrates that Starbucks is not the only name in coffee in the eyes of many consumers.  Furthermore, despite the significant popularity of coffee products, it is possible that at some point in the future, tea or another beverage could emerge as the clear winner, surpassing coffee as one of the most popular drinks.  In addition, Starbucks is not excluded from the ever-increasing prices of fuel and operating costs that are required to keep the business afloat. The aftermath of these circumstances increases the vulnerability of the organization and requires Starbucks to gradually increase its prices to remain profitable.  Perhaps most importantly is the fact that despite the popularity of Starbucks, no organization is safe in a weakening market economy. There is a possibility of creating excess capacity in the opening of new stores should economic downturns occur in 2012-2015 period. Starbucks is particularly susceptible because of its saturation strategy and increased caution regarding consumer spending.  It is more important than ever that Starbucks continue to recognize their most imminent threats and to exercise caution whenever necessary to ensure that their brand reputation and revenue stream are protected at all costs.

Pricing Methodology

Price is about what will charge customers for products and services. Pricing scheme should consider profit margins and the possible pricing response from competitors. In addition, pricing strategies should compose not only the listed price but also discounts and annual membership with additional benefits such as free overtime. Whenever competitors change their prices, the seller usually responds quickly and aggressively. Recently a magazine surveyed coffee drinkers and found that more liked McDonald’s coffee and Dunkin’s Donuts coffee than liked Starbucks Coffee. Yet Starbucks charges $1.60 for a cup and McDonalds and Dunkin’ Donuts only about $1.20 (Boyes & Melvin, 2011, p. 110). Why? Because Starbucks sells not just the coffee, but the entire experience of going to a Starbucks shops. And until McDonalds or some other coffee sellers come up with a way to take away the value that consumers place on the entire Starbucks experience, Starbucks will be able to earn those positive economic profits.

The shareholder of a non-dividend paying company looks through more of a speculative aperture. If the company pays no dividend, then none will ever be paid, because management has little or no confidence in the future of their company. These shareholders own shares more for the capital gains aspect and assume the risk of getting caught in a market collapse. In this case, the shareholder that bought at a high price would need to continue holding until the market recovered, without receiving any dividends or justifying the sale of some shares in lieu of cash dividends.

Boyes and Melvin (2011, p. 111) say that Starbucks has differentiated its product. Differentiation means there are substitutes, but consumers place a value on the brand name. To a consumer, a Starbucks coffee is a different entity than a McDonald’s coffee. They (2011, p. 111) refer to a market in which there are many smaller firms with special attribute is in monopolistic competition. The coffee shop with a special attribute is in monopolistic competition; what occurs is that over time the special attribute loses value as rivals are able to mimic it or come up with the better alternatives. The difference is what consumers value most – what they pay extra for.

Producers commonly provide intermediaries with discounts, or reductions, from list prices. Although there are many types of discounts, they usually fall into one of five categories: trade, quantity, cash, seasonal, and allowance (Pride & Ferrel, 2010, p. 278). Such discounts can be a significant element in marketing strategy.

Financials (Sales and Margins)

Theoretically, marketing objectives elaborate points to be achieved within a given period. Therefore, marketing objectives for Starbucks must be measurable such as objectives to increase revenue by 5% in the 2nd year and 15% in the 3rd year as we use in this calculation for financial sales and margins. Concerning the situation, I suggest future general future strategic objectives of Starbucks as following:

  1. Sales of $3 billion within 3 year of commercial operation, representing over 15,000 unlimited consumers and 5,000 per customers within the 3-year period
  2. Year-to-year Growth of 5% in the 2nd year and 15% in the 3rd year
  3. Maintain net profit of 30% in 3-year period
  4. Retain 93% of sales from subscription segment

Quality control plans become important factors in determining the success of a marketing plan; therefore, there is a need to create quality control plans. According to two of Deming’s 14 principles, the process improvement should follow following criteria:

Table 1            Quality Control

No. Items Measurement
1 Revenue evaluation Quarterly (minimum 80% achievement)
2 Market Share Monthly (min. 60% market share)
3 Customer Satisfaction Index 80% (minimum)

Concerning the financial plan, we assume that Starbucks has two schemes: packaging (monthly subscription) and non-packaging plans each with different requirement. Following table represent the projected turnover or revenue within the next three years (2012-2014). This number is in line with the profit plan as presented at previous section.

Table 1            Projected Revenue/Turnover in 3-Year Period

The increase in the volume of sales within the coming period would result in the profit plan. Assuming that there is no additional purchase of fixed cost then the 5% increase in sales in the 2nd year and 15% in the 3rd year will also increase the total variable cost by 5% and 15%, respectively. The calculation revealed that an increase in sales and cost of sales by 5% and 15% in the 2nd and 3rd year will create a 30% increase in gross operating profit. In short, the proportion of fixed cost is 57% of the total cost and variable cost is 43% of the total cost. Fixed costs compose of rental facilities and employees costs while variable costs include electricity, maintenance and many others.

Recommendations and Conclusion

Starbucks, with its currently imposing brand strength should add Starbucks Blonde roast to the portfolio as its strive to develop over 500 stores in the 2012-2014 financial period, and employ a Strategic Canvass Approach, in which values are delivered to customers to ensure the achievement of shared success, through the delivery of strategic packages through single pictures that are unique to the market (Shariff & Abington, 2012).

The  continued use of Farmers Support Centers in established and new farming locations  to ensure loans are distributed and technical advice  imparted in a timely manner to facilitate the use of right practices, should begin the delivery of value process, as this will ensure quality coffee beans are produced for processing and consumption by global consumers. This strategy will ensure other farmers in other locations are attracted to the package delivered, due to the financial rewards and support offered and further drives the Starbuck Strategic Canvass Approach in the market place.

Starbuck will also be well advised to continue with cultural, modifications all its newly recruited manages and franchises in locations the best represent its model for meting customers globally, so that the same set values and practices can be replicated and enable customers to look forward to the Starbucks Experience, even when they are tourists in other countries.

Financial downturns was a significant threat to the company success in the 2007-2009 period, but it can hedge against this by extending its purchase of coffee at fixed price and to price to be fixed commitments, as well as acquiring greater storage capacity in centralized strategic locations. This will enable it to deliver its brands at competitive prices that also meet the budget of its customers.

Finally, Starbucks must realize that values and benefits must also be aligned with its internal stakeholders or employees, and must conduct timely job evaluations, job satisfactions surveys, in order to promote and other wise reward these important players, so that it can maintain the excellent, experienced, diverse and stable organizational structure it has attained and used skillfully to generate revenues as high the $8.96 b in 2010.

From the above analyses, we have come to a conclusion that despite the company’s success, Starbucks leaders understand their current and future vulnerabilities. For example the larger Starbucks grows; the harder it will be to foster the unique Starbucks Experience. To put it simply, in the words of Howard Schultz, Starbucks has to work to “stay small while growing big” (Michelli, 2007, p. 14). To that end, the future of Starbucks lies in its partners owning millions of positive daily interactions throughout the Company.

 

 

 

 

References

Andrejczak, Matt. (July 28, 2011). Starbucks to increase new store openings. Market Watch. Retrieved August 18, 2011 from <http://www.marketwatch.com/story/starbucks-to-increase-new-store-openings-2011-07-28>

Boyes, William, & Melvin, Michael. (2011). Fundamental of Economics. Cengage Learning, 110-115. ISBN: 0538481196

Fellner, Kim (2008). Wrestling with Starbucks: Conscience, Capital, Cappuccino. Rutgers University Press.

Michelli, Joseph A. (2007). The Starbucks Experience: 5 Principles for turning ordinary into Extraordinary. McGraw-Hill Professional.

Pirko, T. (2008). Starbucks tries to roast its competition. Retrieved August 18, 2011, from <http://marketplace.publicradio.org/display/web/2008/03/19/starbucks_competition/>

Pride, William M., & Ferrel, O. C. (2010). Marketing Express. Cengage Learning, 278-280.

Shariff, A., Abington, A. (2012). Solution Focused Strategy Canvassing: An Approach to Enabling Collective Effort in Making Strategic Happen Inter Action Vol.2 Issue 1 Ashridge Business School www.ashridge.org/UK , 01/25/12

Starbucks Newsroom (2010). Starbucks Aim Innovation at Multi-Billion Dollar Global Coffee Market Starbucks www.newstr=arbucks.com/article_display.cfm?aticle_id=578 , 01/25/12

Starbucks Corporation (2011). Fiscal 2010 Annual Report www.phx.corporate-ir.net/External.File?item…t=1 , 01/25/12

UW Business School (2003). Starbucks Corporation: competing in a global          market. Retrieved August 18, 2011, from <http://bschool.washington.edu/gbc/documents/starbucks_final.pdf>

Vinzant, C. (2007). Starbucks perks up the competition: which national chain serves up the best brew? Retrieved August 18, 2011, from <http://money.aol.com/special/canvas/_a/starbucks-perks-up-the-competitionwhich/20070110145109990001>