Introduction
Today, the global financial situation is far from ideal as economies are recovering from the effects of the recent recession. For this reason, it is imperative for one to begin their day with a sip of coffee to handle the problems brought about by the tough economic times. As such, the pertinent question is whether Starbucks can sustain its business approach and position in the market. Consequently, the primary focus of this paper is to evaluate the company’s business as well as its respective practices (Wu, 2013).
Today, Starbucks is the largest coffeehouse firm globally with over 16,000 stores in 94 different countries including Australia, China, and Puerto Rico. The company has a workforce of over 140,000 individuals globally and serves over 5 million consumers on a weekly basis. Furthermore, Starbucks features in the Top 100 Companies to be employed in as listed by Fortune Magazine in 2008 in addition to featuring in Business Ethics’ 100 Best Corporate Citizens for the last four years in a row. Regular consumers visit Starbucks at least six times a month while devoted consumers visit the business at least 18 times monthly (Kumar, 2016). These users spend a minimum of 50 US dollars every single time they visit the store. Based on this understanding, it is evident that Starbucks holds the market leader position in its area of business.
Strategic Analysis of Starbucks
Macro environment (PESTEL Analysis)
Political
Starbucks faces three core political factors in its external environment. They include the regional amalgamation of markets, the increasing legislative support for infrastructure development, and the administrative red tape in emerging economies. Regional integration of markets can be considered as an opportunity for the firm to continue its global expansion strategy (Wei, 2016). Governmental support for infrastructure development can also be regarded as an opportunity since it facilitates the company’s access to more markets and suppliers. However, the regulatory red tape in most nations is a threat to Starbucks’ business since it may hamper its global expansion approach.
Economic
The financial aspects that are of most concern to the company in its macro-environment include enhanced growth in developing nations, a reduction in the levels of unemployment, and increasing labor expenses in suppliers’ countries (Mathew, 2014). The first two factors present opportunities for the organization to accrue more revenues from a wide range of markets across the globe. However, the final factor is a threat to the company because it raises the firm’s expenses in terms of buying ingredients since the company obtains most of its coffee from third world countries.
Social
The key social factors that Starbucks need to address in is macro-environment comprise of an increasing coffee culture globally, heightened healthy living awareness, as a well as a growing middle class. In the case of a growing coffee culture, Starbucks has the prospect of raising more income based on the increased demand for specialty coffee. Furthermore, the fact that the middle class is growing is another opportunity for the company to gain new consumers who will increase the firm’s returns (Dess, McNamara & Eisner, 2016). Finally, increased healthy living awareness is also another opportunity for the company because it can diversify its products to attract health-conscious customers.
Technological
These factors include an increase in mobile-based buying, technology transfers to coffee farmers, and an increasing number of specialty coffee-making equipment for home use. For this reason, the first factor is an opportunity in that the company can design applications and other linked services to capitalize on mobile purchases. Furthermore, the firm has the chance of enhancing its supply chain reliability because of the new technologies available to the farmers. However, the last factor is a risk to the organization’s operations since it enhances the obtainability of alternatives to Starbucks’ goods (Geereddy, 2012).
Ecological
The core environmental factors that the company needs to meet include the business sustainability trend, increasing support for responsible sourcing, as well as increasing clamor for ecologically friendly products. All the three factors present opportunities for the company to take advantage of since the business sustainability trend emphasizes the need for business activities that have a reduced impact on the environment. On it, part, responsible sourcing calls for corporate social responsibility in the supply chain. As such, the company can improve its performance in these two aspects (Lemus et al., 2015). Finally, the company can address the last factor by offering its products in recyclable packaging.
Legal
Product safety laws, genetic modification regulations outside the US, and heightened staffing rules represent the core factors that the company needs to oversee. Regarding, the first two aspects, the company can be considered as engaging in what is expected. However, they present opportunities for it to increase its performance. On the other hand, the increasing regulations in relation to employment present a threat to the company since they limit the firm’s access to labor markets especially in the emerging economies (Kim et al., 2002).
Microenvironment (Porters 5 Forces Analysis)
Threat of New Entrants
In the specialty coffee sector, this factor is moderate in that the barriers to investment are not lofty to put off new players. As such, the opening outlay for new firms is not substantial since they can hire outlets and paraphernalia pointing to a modest level of outlay. Nonetheless, the comparatively stress-free entry is canceled out by the big companies that enjoy brand recognition among the consumers who have attained economies of scale through the minimization of costs, and enhancing efficiency with a large significant market share (Lingley, 2009).
Threat of Substitutes
There is a wide variety of substitute drinks to coffee, which includes tea, fruit squashes, fresh water, and soda. Furthermore, taverns that retail alcohol-free refreshments could be a substitution for the social ambiance that is associated with Starbucks (Wu, 2013). Furthermore, consumers can have homemade coffee because of the increasing availability of coffee-making machines for home use. For this reason, the industry is characterized by the threat of substitutes being high.
Bargaining Power of Buyers
A diverse range of customers resulting in a situation where no single customer can demand a reduction in price marks the coffee sector. Since the products in this industry are vertically differentiated in addition to the consumer base being diverse, the outcome is low volume purchases, which eliminates the power of buyers (Nguyen, 2016). Furthermore, customer’s exhibit restrained concern regarding first-rate coffee selling since they are inclined to pay prices above the market average for products with enhanced quality. However, they are keen on spending excessively in case the quality does not match the premium price. For this reason, the coffee sector has a modest to little stress concerning the negotiating influence of purchasers.
Bargaining Power of Vendors
The core resources into the Starbucks supply chain include coffee beans and first-class Arabica coffee, which is cultivated in specific areas globally. This aspect means that the price of swapping between alternative merchants is reasonably reduced. Because of its corporate magnitude, the company can exploit its suppliers. However, the company engages in a Fair Trade Certified Coffee under which is a component of its Coffee and Farmer Equity program, which accords suppliers a good partnership status. For this reason, there is moderate to low power regarding the bargaining power of vendors (McVicar, Clark & Manning, 2016).
IIntensity of Competitive Rivalry
The specialty coffee sector is characterized by a monopolistic form of competition with Starbucks enjoying the greatest market share while its competitors also have a substantial amount of the market share. This aspect creates high pressure on Starbucks since consumers do not incur any costs in switching to other competitors (Reinhard, 2015). However, it should be noted that Starbucks safeguards its competitive advantage through the differentiation of its products by offering premium goods and amenities, which moderates the intensity of the rivalry. For this reason, the intensity of competitive rivalry in the industry can be considered as high to moderate.
Internal Environment (7s Model)
Shared Values
The greatest characteristic value for the company is the ‘Starbucks Experience.’ As such, the company ensures that its entire staff competitors to delivering and validating this notion among the consumers (Schultz & Yang, 2009).
Strategy
Starbucks has grown aggressively in North America as well as throughout the World. This aspect is reinforced by the fact that the number of the company’s retail outlets increased by 35 percent in the last decade. In an attempt to spread the Starbucks Experience globally, the firm has opted to focus on its core competency, which is coffee (Adamy, 2008).
Structure
The organization of the company is regarded as being functional in that it can be considered as being unstructured. This assertion high quality by the fact that the firm emphasizes on the development of new ideas in addition to encouraging staff input to its structural processes (Brooks, 2012).
Systems
The company has a variety of systems that facilitate the successful management of the organization. However, the company’s core systems focus on product knowledge as well as product development (Collet Miles, 2013).
Skills
Starbucks creates a unique competitive edge by ensuring that their front line staffs are knowledgeable and friendly. Additionally, the Starbucks Coffee Experience is propagated by the cultivation of strategic alliances with the principal grocery outlets, hotels, and airline companies (Kumar, 2016).
Staff
The company has instituted generous benefits incentives in addition to implementing comprehensive training for its employees. The implication of this aspect is the presence of high-quality staff for the company in a retail setting while the problems facing other conventional retailers such as employee turnover and motivation are minimized (Alteker, Dwivedi & Vashisht, 2016).
Style
Starbucks’ style can be termed as inventive, dynamic, and team-oriented (Alstete & Meyer, 2011).
Organization Capabilities and Competencies
The central proficiency of Starbucks lies in its knack to influence its primary product differentiation approaches successfully by providing a superior product assortment of excellent drinks and refreshments. As such, the firm’s brand equity is founded on retailing high-quality coffee in addition to offering each consumer a unique ‘Starbucks Experience’ built on excellent customer service and clean, well-managed stores (Werbach, 2013). Furthermore, Starbucks focuses on ensuring that their outlets mirror the culture of the communities they serve to build a high level of customer loyalty to the brand.
Another fundamental competence associated with Starbucks relates to the management of its human capital. The company is renowned for adopting a values-based approach, which creates robust internal and external relationships with suppliers. The implication of this aspect is the facilitation of the company’s business approach of ensuring an organic expansion of its stores in global markets, horizontal incorporations through shrewd acquisitions, and partnerships that consolidate its long-term planned aim of being the most renowned and esteemed brand globally (West, Ford & Ibrahim, 2015).
Product Ranges
The company has grown its product line such that it comprises of freshly prepared coffee, searing and chilled espresso drinks, chocolate and non-coffee mixed brews, Tazo Tea, parched pies, club sandwich, as well as salads. On the other hand, the international buyer goods comprise of Frappuccino contained in bottles, chilled coffee, espresso beverages, unprocessed coffee beans, tea, alcoholic beverages with coffee additives, and first-rate ice cream (Michelli, 2006).
Competitor Analysis
As the company with the largest market share in the coffee sector, Starbucks faces both direct and indirect competition. As such, the company’s core competitors include quick-service restaurants and specialty coffee shops. The competition that the enterprises face is both local and international. As such, Starbucks’ indirect rivals are supermarkets and quick-service stores that retail whole bean coffees, which form the company’s core business. On the other hand, Starbucks’s direct rivals comprise of the growing number of specialty coffee outlets (Brizek, 2014).
Dunkin Donuts
This represents one of Starbucks’ direct competitors for both the local and international market. The company has over 13,000 retail stores located in over 50 nations globally. In the 2006 fiscal year, the company announced sales of up to 6.4 billion US dollars (Brooks, 2012). With the headquarters of the firm being in Massachusetts, it is renowned for its doughnuts and coffee offerings. However, over time, the company has embarked on adding new products to its portfolio. The additions include bagels, muffins, breakfast toasties, and Pizza. In its quest to compete with specialty coffee stores such as Starbucks, Dunkin Donuts has increased its coffee products to incorporate flavored coffee lattes, coolattas, flavored hot chocolates, as well as tea (West, Ford & Ibrahim, 2015).
McDonalds
McDonald’s is headquartered in San Bernardino, California with the company operating over 31, 000 stores across 118 countries internationally. Research data shows that the firm serves up to 55 million customers daily making it the world’s leading fast-food eatery. Although Starbucks holds the leading position in terms of market share in the specialty coffee business, competition from McDonald’s was heightened after the company decided to upgrade its coffee offerings in 2006 (Adamy, 2008). Today, the company offers specialty coffee drinks in all its 14,000 stores across the US with most of its products attracting former Starbucks customers. It should be noted that McDonald’s boasts of a bigger consumer demographic compared to Starbucks since it caters for children, teenagers, and adults based on its well-recognized menu offerings. Furthermore, it has an enhanced volume of traffic over Starbucks. These aspects coupled with a robust brand name and a loyal consumer base makes McDonald’s a significant competitor to Starbucks’ business (Reinhard, 2015).
Current Strategic Approaches
As explained by Michael Porter, there are three possibly useful generic strategies. The first one is overall cost leadership, followed by differentiation, and finally, focus. Overall, cost leadership entails the attempt to ensure cost reductions in all departments of a company through managing overhead, avoiding less lucrative consumers, as well as forfeiting research and development strategies (Liu, 2015). Moreover, it also overlooks customer service and promotion in addition to other aspects that are not critical to the direct production processes. On the other hand, the differentiation strategy involves the creation of a product that is considered exceptional in the market. This may incorporate various approaches such as brand image, technology, attributes, and customer amenities. The last generic strategy advanced by Porter is the focus. According to this method, businesses target a particular cluster, topographical market, or segment of a particular offering (Lingley, 2009).
In its current activities, Starbucks has adopted a differentiation strategy in that its focus on offering products that are considered unique in the market. The company has focused on ensuring that it leverages its brand image to attract customers in addition to providing high-quality coffees at premium prices. Furthermore, the company lays emphasis on excellent customer service with its ‘Starbucks Experience’ approach to business (Mathew, 2014). However, it should be noted that during the early stages the company used the focus strategy in that their target consumer base was narrow with the focus being on wealthy, educated, coffee enthusiasts who preferred quality at a discounted price.
Summary (SWOT Analysis)
Strengths
Starbucks enjoys a strong market position in addition to having international brand recognition. This aspect is highlighted by a 37 percent market segment in the US and establishments across 60 nations worldwide. Furthermore, it took position 91 in the list of the best global brands in 2013. This aspect has enabled the company to have a substantial competitive advantage over its rivals (Grant, 2016). The other strengths of the company include the provision of high-quality products, effective human resource management strategies, consumer loyalty, and a diverse product mix.
Weaknesses
The core weakness of the enterprise lies in the prices consumers have to pay for their products. Although they are of proven quality, in tough economic times such as during the recent recession, consumers are likely to go for substitute products at lower prices. Another weakness that the company needs to address is the saturation of the market due to its aggressive expansion strategy. This problem is pertinent in the US where the company runs over eight, 000 stores. The company is also too depends on the US market making its profitability dependent on the growth prospects of the US economy (Geereddy, 2012). Finally, the coffee culture that Starbucks tries to perpetuate may not be widely accepted internationally as it is in the US.
Opportunities
The need to expand into emerging markets represents one of the key possibilities for the company especially with concerns over its over-reliance on the US market. As such, the company has made good moves abroad with India being one of the countries added to the list of new markets. Another opportunity is presented by the need to diversify its product offerings. This has been highlighted by the company’s smart acquisitions to venture into the tea and fresh juice markets. Finally, the field of technology represents another opportunity for the enterprise with the Starbucks mobile application facilitating mobile purchases from consumers (Stinson, 2014).
Threats
The biggest threat to Starbucks is the increase in competition especially from direct rivals such as McDonald’s and Dunkin Donuts that are offering specialty coffees at discounted prices. Additionally, the volatile nature of prices in the international coffee market presents another threat for the company since it has no capacity to influence these fluctuations. Finally, changing consumer tastes and pivot towards healthy products is a threat to the sustainability of Starbucks in the future since there is a risk of the coffee culture being a passing trend (Marques, Camillo & Holt, 2015).
Recommendations
The biggest growth prospects for Starbucks lie in the international market in emerging economies such as Brazil, India, South Africa, and Mexico. The essential characteristic of these countries that Starbucks needs to exploit is the increase of the middle-class population, which provides a significant number of new customers for the firm. Although it has made inroads in China, and recently in India, it still needs to venture to the other new markets to establish an early foothold in the coffee market. However, it also needs to stay vibrant in the US to facilitate its growth in the emerging economies. As such, it should ensure that its personnel is allowed to customize store formats, introduce local product mixes, and prices that reflect the lifestyles as well as the tastes of individuals in the overseas markets.
The second strategy recommendation involves the issue of fluctuations in the international price of coffee beans, which is a fundamental input in the company’s value chain. To deal with this risk, the company can employ a hedging plan regarding future contracts to ensure that its estimated quantity of inputs is maintained at a low swing price. This aspect will make sure that future outlays can be controlled to some extent.
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