Introduction
Globalization of world market has resulted in the integration of regional economies, societies and cultures through a globe-spanning network of communication. The result of the integration of national economies into the international economy through trade, foreign direct investment, capital flows migration, and the spread of technology is the increased competition for businesses. In order to succeed, a company must, therefore, develop a proper strategy. The strategy focuses on two things: a decision on where the business wants to go, and how to go there. The strategy will help it come up with a focus and plan for the market that ultimately ensures the company has a competitive advantage. Such programs serve to make sure that the package the company offers is more appealing than that of its competitors
The company’s management must establish moves and approaches it will use to grow the business, attract and retain customers, stake out a market position, compete favourably, and conduct its operations with the aim of realizing its objectives, business model and strategic vision. The strategy must therefore clearly outline the mix of competitive and operating approaches that the entity has decided to employ so as to move the company in the desired direction and improve its performance (Treacy & Wiersema, 2003).
A well thought strategy should result in building revenues, reducing costs and ensuring handsome profits. Also, it is important the process of strategic planning captures critical issues surrounding the entity and its industry. The planning should not only rely entirely on historical data but also anticipate challenges and spot trends. The success of strategy formulation, implementation and evaluation must be supported by the continued support of committed leadership. The organization's leadership must craft a pathway that allows it to build momentum for the future
Overview of the company
Founded by English teacher Jerry Baldwin, history teacher Zev Siegl, and writer Gordon Bowker in the year 1971, Starbuck Corporation has grown in stature to become the world’s largest coffeehouse company. It has by far been the most successful coffee shop chain in the recent few decades. The company has grown aggressively to beat of its competition.
At present the corporation has more than more than 17018 retail outlets in more than 50 countries worldwide.1971 marked the opening of the first ever Starbucks coffee shop in Washington, America this was followed by a remarkable achievement of opening the first outlet outside North America in Tokyo, Japan in the year 1996. Since then the enterprise has stretched into other markets notably the UK market in 1998 opening more than 60 stores. The initial investment into the UK market was worth $83 million
The corporation retails drip brewed coffee, Coffee beans, other hot and cold drinks, sandwiches, snacks, pastries and Panini. The outlets are strategically located and each site set up so as to give the customers a unique atmosphere and experience. Also, the have the opportunity to read or enjoy music while taking their coffee
Generic strategies
The relative position that a firm occupies in the market is dependent on the choice of competitive advantage it makes and its selection of competitive slope. A firm can, therefore, decide to employ cost leadership or differentiation. The company’s competitive slope establishes whether the entity will target the large industry segment or it will focus on a particular part (Treacy & Wiersema, 2003). According to Porter, the success of business is primarily based on its choice of the type and slope of the competitive advantage. Each competitive advantage has risks associated with it.
In a framework fronted by Treacy and Wiersema, they argue that a firm can gain competitive advantage if it pursues and emphasizes any of product leadership, operational excellence and customer intimacy
Porter’s five forces analysis
Michael Porter uses five variables namely: buyers, industry suppliers, potential new entrants, substitute products and the competition among existing firms to analyze the environment in the industry and develop a successful strategy (Porter, 2008). In this study, the research is based on the analysis of the competitive environment in which Starbucks Corporation has been operating for the last two decades.
Industry rivalry
The intensity of competition that Starbucks Corporation experiences is determined by the exit barriers, corporate stakes, diversity of competitors, informational complexity, industry growth rate, fixed costs, product differences, brand identity, switching costs, concentration and balance and intermittent overcapacity (Porter, 2008). The growth in the industry was attractive to the other coffee companies who initially sold coffee in grocery stores. The companies responded by introducing their versions of traditional supermarket brands. The terrain in the coffee industry has changed, and Starbucks now compete with large and small coffee shops built in several parts of the country. The coffee chains have specific ways in which they are differentiated to Starbucks.
Over time, Starbucks has undergone rapid development and is now completing the established McDonalds. This has been made possible through their introduction of drive –through windows and the breakfast sandwiches
Potential for new entrants
This is determined by the economies of scale, brand identity, switching costs, government policy, expected retaliation, absolute cost advantage, access to distribution, capital requirements, and proprietary product differences (Porter, 2008). With over 1700 retail outlets Starbucks enjoys economies of scale that reduce the cost of operations thereby limiting the number of new entrants.
Substitute product
The threat of substitutes is determined by the relative price performance of the replacement product, the switching costs, and the propensity of the buyer to replace (Porter, 2008). Over time, the threat of substitution in the coffee market has decreased. Many companies initially offering substitute products have entered the coffee business and are now offering their quality coffee into the market. Presently the substitute products in the market are caffeinated soft drinks that Coca-Cola and Pepsi offer. These caffeinated drinks offer little threat to the coffee industry. Trends in the consumer behaviour indicate that coffee is gaining preference over carbonated drinks in the recent past.
The bargaining power of buyers
The buyer power depends on the substitute products, buyer information, buyer volume, ability to integrate backward, buyer switching costs relative to the firm’s, buyer concentration compared to the business concentration, price sensitivity, product differences, incentives, impact on quality and brand identity (Porter, 2008). The American coffee market is valued at over $18 billion; this implies that the number of buyers in the market is significant. Such large number of customers ensures reduced buyer power.
Supplier power
It is determined by the differentiation of inputs, supplier concentration, impacts of inputs on cost of differentiation, cost relative to total purchase in the industry, presence of substitute inputs, switching costs of suppliers and firms in the industry, importance of volume to supplier, and the threat of forward integration relative to the threat of backward integration by companies in the industry (Porter, 2008).
SWOT analysis
Strengths
Motivated staff: The human resource available to a business is a critical factor in determining the nature of the strategic plan to be developed and adopted. The set of skills, knowledge, experience and the capabilities of the labour force in the organization is key to its success (Fernando, 2011). To ensure an able and competent workforce, the organization must be keen on its recruitment process and ensure there is sufficient training to improve their capabilities. In doing so, the human resource gives the company a competitive advantage. However, the recruitment and training strategy is usually limited by the financial capacity of the organization (Growth, 2014). Nevertheless, the company must ensure the staff gets the required training. Also, the ability of the workforce to adapt is key to the organization’s strategic flexibility. The strengths and weaknesses of this factor can be assessed through the examination of records of labor disputes in the group, remuneration relative to the industry, employee turnover, and education, technical and professional qualifications of the employees.
In particular, the front staff is very instrumental in the success of any entity in the coffee industry. Proper manners and skills of such staff are necessary to make customers come back. At Starbucks, teamwork and collaboration are among staff are key competencies. Outstanding service delivery by the staff ensures that the customers come back
Good business culture: The culture that prevails in an organization is as important to its success as it is important in establishing a good strategic plan. The attitudes of the employees in an organization and their ability to commit and remain loyal are essential determinants of the ability of the company to obtain and retain its competitive advantage (Fernando, 2011). The presence of negative attitude among the employees can severely affect the implementation of a well thought strategic plan. On the other hand, positive attitude of the workforce will impress not only the management of the organization but also its customers. Starbucks ensures that the managers train their staff properly. This step ensures that the staff has a right attitude and understanding of what is demanded of them.
Financial strength: Financial strength is a crucial factor that shapes the internal environment of a business and by extension its strategic planning. An enterprise may have a favourable internal environment based on other factors but without the funds it near impossible to implement strategies in its strategic plan (Fernando, 2011). The financial struggles also have effects on the morale of the employees as it leads to excessively tight budgets for them to use. The economic strength is determined by the ability of the firm to borrow funds. The ability to generate funds determines the capacity of the entity to withstand the fluctuations in demands and profits
With its share of the American coffee market, Starbucks has enough money available to the entity to execute most of its strategic plans. The profit realized from operating over 1700 outlets is enough to generate the necessary funds. Also, the entity enjoys economies of scale from its bulk purchases.
Weaknesses
Over-reliant on the local consumers: Albeit the big size of the domestic market for coffee, over-reliance on such a market can be disastrous for any organization. The coffee market in America is estimated at over $18 billion (Growth, 2014). The situation might leave the business vulnerable in the event of unexpected change. Economic conditions such as recession may alter the disposable income patterns of the consumer population thereby affecting the income of the enterprise.
Opportunity
The trend in the coffee market is shifting. The customers are now buying more of the expensive organic coffee which accounted for $1.3 billion of imports the changes in the consumer behavior relates to the social factors and presents the Starbucks with an opportunity to increase the support to customers and also stand a chance of experiencing high-profit margins as a result (Growth, 2014).
Threats
The threat of competition: The industry in which Starbucks operates is very competitive McDonalds offers the most competition to the entity. Recently, it has been alleged that McDonalds sell better coffee at a price lower than that of Starbucks. This has been damaging for Starbucks and a significant factor to consider in their strategic planning.
PEST Analysis
Political factors
Political factors are those factors that relate to the government’s influence on the company’s business operations. Specifically, the factors relate to the government's influence on the general economy or the industry in which the business is operating. Political environment/factors could also imply the stability of the political leadership; pieces of legislation such as labour laws, environmental laws, and tax policy; goods and services provided by the government; and the governments influence on education, health and infrastructural development in the country (Fernando, 2011). Changes in the political environment could adversely affect implementation of a company’s strategic plan for example when Starbucks was forced out of Israel. The pulling out was harmful to the pension strategy
Economic factors
Businesses world over are affected by both national and global economic conditions. Such economic conditions have a direct influence on the interest rates and the fiscal policy. Also, the behaviours of suppliers, creditors and consumers are dependent on the prevailing conditions. Other aspects of the economic environment could be inflation, unemployment, income levels, distribution and the purchasing power of consumers, cost of energy, cost of raw materials, monetary policies and exchanged rates (Fernando, 2011)
A fall in the dollar rates compared to other currencies has the effect of hampering vital supplies such as coffee beans, sugar and milk. The firm will incur higher costs as a result of weakened currency. The management must make a decision on whether to pass the extra cost to the consumers or to bear it. For this reason, exchange rates issues are a big factor to consider in the strategic planning as they might hinder the implementation
Technological influence
Technical factors are innovations, inventions and development, information and mobile technology changes, the internet, e-commerce, mobile commerce, and new methods of manufacture distribution and logistics. Technology has ensured communication is fast, and businesses should learn to react quickly to such pieces of information (Fernando, 2011)
Starbucks must learn to adapt to the changing technology and take advantage of any opportunities that may result from such changes. Recently, Starbucks has embraced the use of phone payments. This approach has helped reduce the queues during peak hours.
Recommendations for the future
There are quite a number of steps that the management can take to ensure more profits for Starbucks Corporation. The actions should aim at dealing with threats while at the same time taking advantage of the opportunities that arise within the environment. The measures that would effectively work are (Growth, 2014):
Increase its global outlook: by decreasing their expansion efforts within the Us and increasing its efforts to ensure that Starbucks grows outside the United States, the management will reduce its reliance on the domestic market. Such a step would help cushion the company from the domestic economic hardships that may arise. Also by reducing its expansion efforts in the US, the company would help save the capital and invest it in the international expansion strategy. The continued enlargement of the domestic market has ensured that the new outlets cannibalize on the market of the already existing ones. The international market represents an unexploited/ unpenetrated market
Increasing connection with its customers: customers are at the centre of any business strategy, and their satisfaction or dissatisfaction would automatically lead to the success or failure of the business. In the past, Starbucks has stood apart from its competition in the way it relates to its customers. The company has successfully established warm relations with its customers encouraging its staff to welcome the clients by asking them the question “how are you doing today?” also, the corporation believes in the feedback from their customers. Starbucks should find better ways of increasing this client connection, for example, establishing a section within each outlet that will host the photos of its regulars upon request. The strategy will go a long way to making the customers have a sense of belonging.
Improve the coffee: given the current competition in the coffee market, it is critical that Starbucks establishes and maintain a reputation for quality coffee. Consumer reports in the past have revealed that the consumers rate McDonalds drip coffee as tasting better than that of Starbucks. To ensure that the entity improves the quality of their coffee, they should conduct a proper analysis of the coffee brewing process and practices. The appraisal will reveal the weaknesses and establish possible measures that can be taken to make the coffee taste better. The success of the brewing process should be judged on its ability to bring out the distinctive tastes of different coffee varieties. The company must also strive to patent the brewing process they deem to be the best. By doing so, it protects its competitive advantage.
Free wireless and renting out meeting space: by installing the free wireless internet in its retail outlets, the corporation is creating a business and technology friendly environment for its customers. The advent of the internet and the continuously increasing number of electronic gadgets that requires it for optimal functionality, there has been a change in consumer’s trends. Recently, there has also been a notable shift in consumer work locations from office buildings to home offices. Starbucks should be able to cater for the needs of its consumers by availing meeting spaces for rent.
Conclusion
Starbucks is a successful coffee chain that strives to increase its profitability. The strategy going forward should be to improve the perception that the product the corporation offers is quality. Also, it should adapt their stores to the lifestyle of the consumers and the trends in the market while at the same time trying to extend its operations to the countries/areas that it has not explored before. This strategy is simple but if well adopted can ensure the company excels
References
Fernando, A. (2011). Business environment. Chennai: Pearson.
Growth, S. (2014). Starbucks Details Five-Year Plan to Accelerate Profitable Growth. Starbucks Newsroom. Retrieved 31 March 2016, from https://news.starbucks.com/news/starbucks-details-five-year-plan-to-accelerate-profitable-growth
Porter, M. (2008). Competitive advantage.
Treacy, M., & Wiersema, F. (2003). The discipline of market leaders. London: Profile.
