Question #2
Which one of the Five Competitive Generic Strategies Most Closely Approximates the Competitive Approach that Starbucks is employing?
Starbucks’ competitive approach is based on the differentiation strategy. By definition, the differentiation strategy seeks to develop a product or service that can offer unique benefits to customers and which customers can perceive to be superior to products offered by competitors. In simple terms, differentiation makes products unique by adding value, which allows companies to attract customers and charge premium prices for their products. Because of the product’s superior quality and unique attributes, the firm develops more brand equity, which is necessary for effective market participation. Differentiation also enables companies to be innovative and economical in resource utilization.
As part of the differentiation strategy, Starbucks maintains their brand by managing all aspects of the production process in all stages of the supply chain. These include growing the coffee plant, selection of coffee nuts, roasting and grinding of the beans of the nuts and selling of the coffee in their shops. Because they do every bit of the production process by themselves, Starbucks have eliminated the need for costly intermediaries. Consequently, its products are priced relatively cheaper than competitors’ products. The company has also managed to eliminate unnecessary business processes from its operations thereby creating a lean organization, which differentiates it from competitors. It has made Starbucks the best organization for employees to work.
Starbucks can also be differentiated through its corporate social responsibility initiatives. The company has committed to doing business responsibly in an initiative called the ‘shared planet.' This initiative involves ethical sourcing, environmental stewardship, and community involvement. Ethical sourcing entails forging strong relationships with farmers who supply coffee to Starbucks. Long-term relationships enable Starbucks to get a constant supply of coffee despite adverse fluctuations in the global coffee market. Environmental stewardship is all about taking measures to limit harmful effects of Starbucks business on the environment. Starbucks has differentiated itself through its slogan that states that caring for the environment encourages others to do the same. The company endeavors to reduce its environmental footprint each year. Finally, community involvement is about giving local communities an opportunity to participate in building the Starbucks brand. This can be through the provision of job opportunities and respond to social issues (Thompson 25-27).
It is through the differentiation strategy that Starbucks have managed to succeed in an industry that was until recently characterized by monopolistic market structures. The Starbucks founder understood that to be successful in the coffee brewing industry; a company ought to invest in more than just the espresso machine and grounded coffee. Rather, investing in high-quality products, barista training, and unique store design were key success factors for the company. This differentiation strategy has enabled the world’s largest coffee house to retain the masses and enter into the premium coffee market, where it retains near monopolistic market powers (Thompson 9-10).
It can be noted that Starbucks has some internal strengths, which have propped its differentiation strategy. The coffee house’s primary strength is access to leading scientific research in coffee production, processing, and brewing. The company has a highly skilled and creative product development team, which ensures that it is always ahead of the competition in all aspects of its business. The sales teams are properly trained and have the ability to communicate strengths of the company. It has given the company a strong corporate reputation for quality and innovation. Unlike its competitors, Starbucks differentiation strategies are hard to be imitated, further making Starbucks the undisputable market leader (Thompson 21).
A key implication of Starbucks’ differentiation strategy is that the coffee house giant must continue innovating to ensure sustainable business growth in the long-run. As the primary generic strategy and source of competitive advantages, differentiation could lose meaning if competitors come up with more innovative strategies. To address this potential risk, Starbucks should review its product mix and supply chain with the aim of keeping them at pace with the current market conditions. In particular, the company should focus on specialty products and ingredients such as low sugar coffee. Where possible, the company should consider franchising and joint ventures as the best strategy for exploiting emerging lucrative markets (Thompson 25-27).
Question #8
What Issues Confront Starbucks as of Mid-2010? What Should Starbucks Management be Worried About?
Even big and successful companies in the league of Starbucks face numerous challenges. Although the company has an outstanding brand reputation, has won many awards for exemplary performance and even initiated high-level corporate social responsibility initiatives, it continues to deal with a plethora of issues. In mid-2010, the most important issue Starbucks was dealing with was the global credit crunch. The crisis caused a massive economic recession in many countries, and therefore, Starbucks business was affected adversely. For instance, exchange rates fluctuated adversely, thereby forcing Starbucks to incur losses in its international trade. In fact, the financial crisis made it extremely difficult for Starbucks to manage its international businesses (Thompson 29-32).
Another important that Starbucks was dealing with in mid-2010 was the impact of multiple shop closures that had occurred in the previous months. Starting from 2010, Starbucks announced that it would be closing over 600 retail outlets in the United States market. The company stated that closure of the stores was related to risks in finalization of third party agreements and expected cost saving benefits. The stores were eventually closed but cost the company in terms of revenue loss, laying off of workers and termination of supplier contracts. Until now, the company is still reeling from the effects of the closures (Thompson 29-32).
Although Starbucks continues to face a number of challenges as other companies in the industry, the global coffee leader is known for handling these challenges in a manner that results in greater benefits and more opportunities for business growth. Although it had to content with multiple store closures, the company was always upfront with customer interests and kept them informed of stores that were being closed and the reason for taking such a decision. It helped Starbucks to retain its customers even as competitors incurred heavy losses and closed down completely (Thompson, 29-32).
Going forward, Starbucks management should be worried about increased competition from other retailers with similar products and operations strategies. These include Timothy’s Coffee and New World Coffee, which have shown the potential to tilt the competitive landscape in the industry to the disadvantage of Starbucks. As competition heightens in the coffee industry, Starbucks should be able to defend its position offensively against emerging competitors. It may require the company to implement extensive initiatives aimed at deterring competitors from encroaching into Starbucks primary market segments. In addition to its traditional mode of direct selling, it is about time Starbucks formed distribution alliances with other industry players to expand its distribution channels and product portfolio.
The management should also be worried about the company’s inability to do business in a price sensitive market especially in low-income countries where customers care more about prices than quality. The increasing cost of milk and coffee is also a reason for Starbucks management to worry. Over the last five years, Starbucks has had to deal with an unrelenting increase in prices of dairy products in both the United States and other parts of the world. Currently, US dairy products are retailing at record highs meaning that Starbucks must revise its coffee prices upwards to get enough profits. Unfortunately, customers are reluctant to pay any extra prices due to a reduction in household incomes over the same period.
It appears that changing economic conditions are likely to impact negatively on Starbucks’ future business prospects. In the United States, the recession persists, and many companies are facing financial constraints. Starbucks is just but one of the many companies whose resilience has declined in the face of these economic challenges. While it remains strong compared to its competitors, signs are clear that things are not working well especially in the domestic market. Therefore, the management should focus more on future trends in economic conditions as these will inevitably affect the company in the long run. Besides, the management should develop a strategy for mitigating potential risks that may arise due to the company’s large scale of operations.
References
Thompson, A. A. (n.d). Starbucks: evolving into a dynamic global organization. Case study #7
