BUSINESS STRATEGY
Business Strategy
According to Data Monitor (2011, p. 4) Starbucks is the world largest specialty coffee retailer with many coffee shops in 62 countries across North America, Latin America, Asia Pacific, Europe, Africa, and Middle East. . Since inception, the firm has been able to traverse the United States and globally and open franchises at an impressive rate. Starbucks headquartering is in Seattle, Washington and employs close to 182,000 people as at September 2013 (Starbucks to outsource its HR Function, 2013. P.17). The firm recorded $14,892.2 million in the financial year ending 2013. Jennings (2012, p.19) says that the firm is a premier roaster, retailer, and marketer of specialty coffee. The business concern offers value-added services not restricted to selling and distribution of products but also creates a differentiating coffee experience in the retail stores to meet unstated needs. That in turn can help the company to survive high completion in food service retail market. Increasing completion leads to price wars that could in turn affect the market share of the company.
Gray & Smith (2009, p. 5) informs that Starbucks operates in high completion zone in foodservice retail industry that demands consistent delivery of quality service to retain the existing clients as well as attract new ones. Apart from the sale of world-renowned coffee blends in different flavors, the company focuses on providing coffee-drinking experience to the store customers. In the past, the firm focused on meeting customer unstated demands and the offering of value-added services. Currently, the firm offers, free, instant, and unlimited Wi-Fi internet connection for all the company-owned stores in Canada and America. Customers that come to its stores can spend time accessing the free offer of internet and the Starbuck Digital Network The digital network is a news and entertainment web portal offered in association with Yahoo.
The modern day coffee customers’ benefit from Cappuccinos, Café Lattes, Frappuccinos, Espresso Macchiatos, and others so as to signify that specialty coffee is here to stay. Adamy (2010, p.42) says that Starbucks is the world largest retailer in the specialty coffee industry that depicts a multifaceted journey. The dominance of the firm in the market and the creation of its brand depict the loyalty, longevity, and integrity.
The origin of coffee starts in the sixteenth century as coffee plays a pivotal role to provide a meeting place for the intellectuals. Coffee slowly spread to Europe recognized for both sociability and taste. As soon as the product crossed the Atlantic Ocean, it replaced beer as the favorite morning drink in New York City. Howard Schultz, a citizen from Brooklyn, purchased Starbucks founded in 1971 in 1986 (Nawotka, 2010, p. 17). Schultz had an inspiration in Starbucks where he visualized coffee drinkers everywhere. Schultz vision concerning Starbucks emerged successfully as the firm penetrated North West market and later opened in Midwest Chicago before expanding into a global empire. As the firm expanded, there was a need to recruit talented leaders with the capability of guiding incredible momentum of the company. The management devoted vast resources to construct an organized infrastructure. According to Harris (2013, p. 4), Schultz believes that many business leaders fail to create proper processes to ensure the implementation of appropriate foundation. In the 90s, leaders of Starbucks create accounting, legal, and financial plans for the firm to join a global market. The firm experienced a turnaround in the 1990s where major cities began consuming its products in a regular basis. The company reaped long awaited benefits using traditional marketing campaign. Since the inception of Starbucks, the founders believed that good relationship between management and employees. The labor force has a profound effect on the sentiment towards Starbucks. The firm stresses the relationship between morale and satisfaction. Starbucks aggressive expansion has enabled it to operate in close to 17,000 stores intentionally (Nawotka, 2010, p.17). The firm sells to 4 percent of the world in specialty coffee industry and can sell to more.
Adamy (2012, p.50) explain that Starbucks competes with players within and against the specialty coffee market. Examples of other competing firms within the specialty coffee market include Seattle’s Best Coffee, Caribou Coffee, Tully’s Coffee and other smaller chains. Firms outside the specialty coffee market include Dunkin Donuts, McDonalds, Proctor & Gamble, and Folgers. Starbucks attempts to leverage the customer loyalty through the offer of premium coffee and ambiance atmosphere in the stores to reduce competition.
The analysis depicts a breakdown of a competitive environment that surrounds the acquisition of the firm by Schultz in 1987 (Harris, 2013, p. 4). The competitive strategy uses a five forces model to analyze the industrial development to develop the optimum strategy for success in the industry using specific parameters. The analysis presents a list of five variables in the model include threat of new firms entering the market, threat of substitutes product, bargaining power of the clients, bargaining power of the supplying firms, and the intensity of competitive rivalry.
Industry Rivalry
Starbucks competes with small local coffee shops in the specialty coffee chains differentiated from the multinational. For instance, Caribou Coffee is a specialty coffee chain that competes with Starbucks. As Starbucks attempt to create upscale ambiance Caribou attempts to implement an American feel in the coffee houses. Caribou imitates Starbucks since it offers free Wi-Fi, soft seating, and numerous fireplaces. The original inspiration of Starbucks, Peet’s Coffee, and Tea Company that originate from Berkeley California poses a competitive threat to Starbucks. Peet like Starbucks undertakes aggressive expansion such as opening a new roasting plant in Alameda in California that will enable them to double their current sales. Some of the stores opened by Peet are in Seattle metropolitan area in an attempt to outperform all Starbucks stores. Peet uses that strategy to differentiate its products from Starbucks when they create super premium brand that offer the freshest coffee in the market. The firm ensures freshness of coffee in the market such as roast to order coffee that involves roasting small batches of coffee (Kalnins & Stroock, 2011, p. 135). Similarly, Starbucks faces the competition of two largest firms in the foodservice industry that recently enter the specialty coffee segment. One of the competitors is Dunkin Donut that claims to be the world largest coffee and baked goods chain. The firm offers coffee beverages in assortment of styles such as cappuccino and espresso. McDonald is the author competitor of Starbucks that started its operation in the late 40s coffee (Kalnins & Stroock, 2011, p. 136). The primary lead to its success is a constant quality standards they achieve for food, quick service, and low prices. McDonald and Starbucks have close competition due to the encroachment of demographic consumer base of each company. McDonald has succeeded in improving the ambiance and atmosphere in its stores that replace bright color schemes with contemporary muted tones and soft lighting. In addition to that, McDonald installs coffee bars with baristas that serve cappuccinos to knock off Starbucks ice-blended Frappuccino. Lee (2010, p. 18) says that McDonald drip coffee has a better taste in comparison to Starbucks. The industry has monopolistic competition with Starbucks having one of the largest market share and the closest competitors having significant market share as well. That will create significant pressure on Starbucks. Consumers do not have switching costs to other competitors, and that can create high intensity in rivalry. Currently, the industry does not have over capacity since growth rate is moderate, and that can cause intensity of competition moderately high.
Threat of new entrants
The main deterrents to entry in the specialty coffee industry entails various barriers of entry. The economies of scale in the specialty coffee industry will increase in proportion to the size of the top layers increase. Dunkin Donuts and McDonald use national distribution channels to enable them transport specialty coffee at a low cost in comparison to potential new entrants that do not have developed distribution systems. Large companies in t industry of specialty coffee economize their operating and marketing operations to facilitate the same departments for all segments coffee (Kalnins & Stroock, 2011, p. 137). The threat of new entrant is moderate since the barriers of entry are not high enough to discourage new entrants to enter the market. The industry has a moderate saturation in the monopolistic competition structure. New entrants face insignificant cost of startup since they can lease stores or equipment at the moderate level of investment. At the localized level, small coffee shops compete with Starbucks and Dunkin Brands since there are no switching costs for the consumers. In a competitive industry, it is possible that new entrants will attain moderate success in the industry. Incumbent firms yield a learning curve advantage due to favorable access of raw material and the relationship they build with their suppliers. Expected retaliation from well-established firms creates moderate barrier to entry.
Threat of substitutes
Many substitute beverages to coffee include tea, juices, water, and energy drinks. Bars and pubs that offer non-alcoholic beverages can also substitute for the social activities of Starbucks. Buyers have the option of making home produced coffee using household premium coffee makers other than purchasing coffee from the retailers such as Starbucks. The threat of substitute products is sharp since buyers are not subject to switching costs for switching substitutes that make the threat high. The primary substitute of products that pose a threat to the specialty coffee industry include caffeinated soft drinks offered by Coca-Cola coffee (Kalnins & Stroock, 2011, p. 138). The substitute products present a little threat to the premium coffee industry. Most people prefer coffee to carbonated drinks. People look for health alternatives, and the evidence shows that the coffee is healthy in comparison to carbonated soft drinks. The industry leaders such as Starbucks attempt to counter the substituted threat by selling coffee makers in grocery stores while that places pressure on the margins.
Bargaining power of Suppliers
Farmers that supply to Starbucks and other chains in the specialty coffee industry unite themselves in fair trade certified coffee organized by Trans Fair in America. Starbucks and others can use that platform to advertise their coffee once they purchase from the coffee suppliers in the democratically owned cooperatives. The initiative designed to ensure compensation for farmers once crops fail. The initiative uses that platform to exert bargaining power over the buyers (Charles, 2012, p.24). The trade fair coffee certification enables consumers to make decisions where to purchase their premium coffee. The farmers of premium Arabica beans are in constant competition with substitute Robusta coffee bean growers. The bargaining power does not diminish the threat as the big premium retailer adopts the substitution. The current industry has many companies and restaurants specializing in a wide array of products in the specialty coffee that can make Starbucks insignificant to farmers. Farmers do not suffer constraints by the specialty coffee industry and specific demand, that will increase the bargaining power of the coffee farmers. As competition increases in the specialty, coffee industry, there is a great emphasis on differentiating products using superior quality. The specialty coffee industry depends on a farmer's success so as to produce high-quality coffee than competitors that will increase the supplier bargaining power. Starbucks diminishes the ability to play one buyer against another to decrease the supplier bargaining power. Today’s supplier, unlike the yesteryears, is more powerful, the unity of the farmers decreases significance of the specialty coffee retailer-purchase premium. The cost of switching between substitute suppliers is low.
Bargaining power of buyers
Large buyers choose to serve Starbucks brewed coffee in their offices. The effects of losing buyers to a competitor are not detrimental to the company with large sales volume such as Starbucks. Individual consumer and the multinational corporation that purchase specialty coffee cannot commit significant resources to the purchases. That will make buyers less sensitive to price fluctuations and give players within specialty coffee industry to have more control in pricing (Charles, 2012, p. 24). The expansion of specialty coffee industry creates a wide array of competitors that offer high-quality specialty coffee. It is hard for players in the specialty coffee industry to differentiate themselves through quality in the industry standard. Buyers face no switching costs and have a wide selection of retailers where they can buy. Buyers of specialty coffee pose a threat to backward integration. The ability of buyers to backward integrate comes from the availability of information concerning demand, supplier costs, and market pricing in the specialty coffee industry. The buyer has a better position to ensure they pay for a favorable price and receive an appropriate level of quality from the product. Buyers depict moderate to low pressure in the premium coffee retailing as they pay for high-quality products.
Limitations of Starbucks
Other than Starbucks enjoying tremendous success in the specialty coffee industry, the firm has experienced a downward trend in its major areas. The Global Financial Crisis in 2008 destabilized its operations where the firm registered a 50 percent drop in operating income (Henderson, 2012, p.68) . Similarly, the firm experienced a decrease of 10 percent in its sales. The decrease in income and revenue translates to a drop in brand recognition. Adamy (2012, p.7) believes that the company’s current value of chain activities also attributes to the company experiencing a downward trend.
Porter’s five forces model emphasis is on value chain activities for a firm to gain strategic competitiveness. It is crucial to create linkages in value activities to maintain a competitive edge over the rivals. The Starbucks business model over the years illustrate gaps in the value chain activities that make it lose a considerable market share in the specialty coffee industry. The firm fails to improve the link between physical activities and the information-processing component for the firm to optimize a value chain. Gray and Smith (2009, p.4) observes that the rapid expansion of the firm in America is the company’s failure to maintain a link between physical activity of opening coffeehouses and the maintenance of the firm’s image and uniqueness in the industry. Additionally the firm fails to maintain a coordinated balance between its store operation and the design. The company’s rapid expansion of opening many local coffee shops within a period is likely to translate to the downgrade of the Starbucks experience that customers choose it over rivals.
According to Harris (2013, p.4) and Henderson (2012, p. 69) Starbucks slips to complex operations and non-standard asset to cause a decrease in revenue in the competitive industry. Starbucks strategic competition slowly disintegrates and the rivals take advantage of its failure since they eat up customer base. Starbucks fails to give attention to strategic marketing that leads to a gap in the value chain. A non-coordination between activities leads to diminution of value in the product. Starbucks failure to set a marketing strategy affects its recent downfall. The firm fails to have a noticeable strategic marketing plan other than opening local shops in different regions. Charles (2012, p.25) asserts that its budget on marketing operating expenses has an oversight to affect its brand. The company allocates fewer amounts on the marketing activities that can enable the firm to sustain leadership in the coffee specialty industry.
Starbucks five-factor success comes from the ability to design a strategic approach of growth that demonstrates that on the feasible business model that takes advantage of key demographic groups. The model depicts an ability to attract high-quality employees through the implementation of superior healthcare plan while reducing the cost of equity ownership to all workers. The use of the strategic alliance with international conservation allows the firm to create a sustainable supply in the chain of high-quality coffee. Other factors that enable Starbucks success include a community environment that permit the establishment of social interactions. The firm can adapt in the changing dynamics of the consumer demographics.
In conclusion, the force created by industry rivalry lead to differential strategies and a focus that discourages price wars in an extreme competitive environment. The strength of the force imposed on the potential for new entrants’ decreases due to formidable barriers of entry. The bargaining power of suppliers and buyers increases due to the oneness of suppliers and information access to the buyers. The forces show that the threat of substitutes is insignificant due to a decline in the sales of caffeinated soft drinks such as coffee in the specialty coffee. An understanding of the five forces affects the industrial environment where Starbucks operates to allow one assesses the structural components and how they change in response to the numerous variables. Some of the Starbuck corporate benefits include market leadership, supply chain locations, superior retail locations, superior real estate locations, and better local demographic compositions.
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