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Starbucks Corporation: An Extensive Analysis
By:
Muhammad Almuhanna
Andre Johnson-Payne
Jessica Pope
Natalie Schiefer
Jordan Sprague
Management 429 – Dr. Yu Liu
April 16, 2012
Table of Contents
Brief Introduction & Key Issues 3-4
External Analysis 4-5
Internal Analysis 5-7
Analysis of Business Level Strategy 7-8
Analysis of Corporate Level Strategy 9-11
Recommendations 11
References 12
Appendix 13
Brief Introduction & Key Issues
Starbucks opened their first location in Seattle, Washington in 1971. Since then, the company’s main focus has been to ethically source and roast the highest quality Arabica coffee beans in the world. The company’s mission is “to inspire and nurture the human spirit, one person, one cup and one neighborhood at a time.” They achieve this by having more than 17,000 locations around the globe and being the world’s largest premium specialty coffee retailer (Starbucks Corporation, 2012).
Starbucks was founded by three acquaintances: an English teacher, a history teacher, and a writer. The three were inspired by entrepreneur Alfred Peet, Dutch American entrepreneur and the founder of Peet's Coffee and Tea in Berkeley, California. The name Starbucks is taken from Moby Dick, after the name Pequod was rejected by one of the cofounders. Therefore, the company was named after the chief mate on the Pequod, Starbuck. Their logo is inspired by the sea featuring a twin tailed siren from Greek myths (Starbucks Corporation, 2012).
Today, Starbucks is the largest coffeehouse corporation in the world. From its start as a local coffee bean roaster and retailer, the business has flourished in just four decades. In the 1990s, Starbucks was opening at least one new store every business day, a growth rate that was sustained until the 2000s. Starbucks went global in 1996, opening their first store in Tokyo, Japan. Today, Starbucks’ international locations constitute for almost one third of their total stores. Of the firm’s 17,000 current outlets, 12,500 are in the United States. (Starbucks franchise success)
Starbucks Corporation offers a wide range of products to meet the demands of their different markets. They offer a variety of fresh brewed to ready-made bottled beverages for those on the go. For those who enjoy their coffee at home, they sell the Starbucks brand in packages. For those who wish to come in and enjoy the Starbucks atmosphere they offer a limited food menu along with their full drink menu. Starbucks is most known for their ability to specialize their drinks to meet the demands of their many different markets.
“Aside from extraordinary coffee, Starbucks has made a business out of human connections, community involvement and the celebration of cultures. We're committed to upholding a culture where diversity is valued and respected. So it's only natural that as a guiding principle, diversity is integral to everything we do.” Starbucks defines their culture as one simple equation, Diversity = Inclusion + Equity + Accessibility. They focus their company-wide diversity strategy on four areas: partners, customers, communities, and suppliers. Starbucks applies their equation to each of these areas in hopes to create a successful and enjoyable partnership that is noticed by employees and patrons alike (Starbucks Corporation, Diversity, 2011).
Starbucks Corporation is focused on creating an environment that respects people from diverse backgrounds, while empowering their employees to perform their best. They believe that by using the promotion from within strategy and by providing employee recognition it will increase the employee morale, which gives them motivation to provide excellent customer service. The company provides training to all their employees, which stresses the importance of their brand image, making Starbucks welcoming to everyone no matter what their background (Starbucks Corporation, Diversity, 2011).
Although Starbucks has been very successful in the past, they still face external problems like every business. Starbucks’ key issues are increasing competition, market maturity and decline, and an unstable macro environment. Competition in the coffee industry is on the rise and is saturating the market. Although there are only a few major competitors in this industry, full service fast food restaurants offering coffee products are on the rise, thus increasing competition. For example, in the last few years McDonalds has added the McCafe products to their product line, offering low price alternatives. These have ‘stolen’ a portion of the market share from Starbucks Corporation, as they are substitute products. Second, the industry has matured and has become saturated. There are only a few major competitors, but there are many small local coffee shops. The third issue is the unstable macro environment. Prices are on the rise and due to the limited number of geographic regions coffee beans can grow in supplier power is increasing. Overall, Starbucks Corporation remains a large shareholder in the specialty eatery industry, but the need for constant evaluation of market forces continues to rise.
External Analysis
According to Yahoo! Finance (2012), Starbucks Corporation is classified as a firm within the Specialty Eatery industry. Starbucks has two types of competitors: direct and indirect. Starbucks Corporation’s major direct competitors are Dunkin’ Donuts, Caribou Coffee, and BIGGBY Coffee, some of which are domestic competitors and others global. The company’s indirect competitors are McDonalds, Tim Horton’s, Panera Bread, Einstein Bagels and 7 – Eleven. The difference between these two types of competitors is the indirect competitors provide a similar offering as Starbucks, but at a lower cost for those price sensitive consumers as well as additional products.
According to Figure 1 in Appendix A, which was created from data derived from Yahoo! Finance, the largest owner of the market share belongs to one of Starbucks indirect competitors, McDonalds. While this is partly due to McDonalds’ large global dominance, the implementation of their McCafe gourmet beverages has permitted them to increase their market share in this specific industry (Yahoo! Finance, 2012). The McCafe products are a cheaper substitute product to Starbucks’ products. A large portion of the market consists of members of all different demographics and that utilize several different business strategies. McDonalds operates under a cost leadership business strategy. They offer products at prices that appeal to larger crowd, namely made up of more price conscious consumers; whereas, Starbucks operates on the premium high end and therefore, while having a smaller market share over all, still own a considerable portion of the market that consists of consumers seeking specialty products.
The specialty eateries industry consists of chain restaurants that offer primarily specialty or gourmet products. Most of these eateries consist of bakeries and coffee houses, or gourmet delicatessens. These restaurants offer a variety of premium coffee drinks, tea, snacks, and a limited food menu. Not only does this industry provide specialty products, but they also provide premium customer service that is unmatched by other fast food restaurants and a social atmosphere ideal for gathering with friends, working on homework, or simply enjoying a coffee.
To compete effectively in this industry, firms must be innovative, convenient, and provide excellent customer service that is unparalleled. The consumers in this industry are interested in something beyond a one dollar cup of black coffee. They like the variety that the specialty eateries offer and will pay the premium price for the many gourmet options that they offer. It is important for the restaurants in this industry to be convenient yet highly consistent for their consumers.
The coffee industry has changed drastically over the last decade or so. Coffee is no longer just black and dressed with cream and sugar; there are so many different offerings to meet the demands of a more youthful demographic. Coffee shops have also changed their atmosphere and have adapted to the demands of its consumers. Many coffee shops have become a social hangout, a place for work meetings, and a place of study for students. In addition, brew at home coffee has also increased in popularity. With the invention of single serve coffee machines such as the Keurig brew machine, avid coffee drinkers can now get their favorite drink at home for a nominal price. Starbucks Corporation has capitalized on this opportunity by offering its own single serve products to its brand loyal customers as well as new customers.
The average coffee drinker usually drinks their coffee in the home, on the go, and in the workplace. One key opportunity for this industry is expansion into the workplace. Every company, big or small, has a coffee room, but not everybody wants a cup of whatever flavor or brand that happens to be on the burner. Most coffee drinkers have a specific drink, flavor or brew that they prefer which opens up opportunities within the workplace. Large corporations often have cafeterias or restaurants within their facilities. Of course, this opens the door for companies to build a smaller coffee shop within their facilities for visitors, employees, and small one on one meetings. Starbucks should capitalize on this and open smaller versions of their restaurants in the business place to increase their convenience and transparency to their consumers.
Another key opportunity in this industry is the invention of in-home single serves coffee drinks, previously mentioned. The Keurig has tapped the well for specialty coffees in the home. Starbucks should look to the future of these machines to anticipate the inclusion of more complex specialty drinks such as flavored cappuccinos, lattes, and teas. Some specialty drink coffee machines already exist, but the price point of these machines are far too high to be in the average consumer’s home. However, technology is rapidly evolving and this may not be the case for much longer.
With any company that falls under the umbrella of any sort of restaurant, the threat of substitute product is always present. This industry is especially vulnerable because there are a large variety of substitute beverages and food products. Coffee beans only grow in subtropical regions or equatorial regions at latitudes lower than 10 °, which means the supply is limited (Coffee Research, 2006). This gives suppliers considerable power over smaller firms, but not over the largest firms. Added to that is the fact that fuel costs have been on the rise and trends suggest they should continue. Overall, Starbucks holds considerable market share, and is large enough to hold bargaining control over suppliers. Their niche products make them a key player in the specialty eatery market, but they must continue to manage competition to be successful.
Internal Analysis
The enormous success of the Starbucks Corporation is prevalent throughout the United States and around the world. Over the course of Starbucks’ history, they have built an outstanding reputation by creating a well-recognized brand, excellent customer service, focus on social responsibility, and of course, having the highest quality of beverages. All of these contribute to Starbucks’ key strengths.
One of Starbucks’ greatest strengths comes from anticipating customer needs and providing unprecedented customer service. The company prides itself on creating an environment for people to meet, outside of work and home, what they call the “third place” (CNBC Business, 2011). In order to manifest this goal, Starbucks’ locations are all equipped with high quality interior design, functional and clean facilities, as well as appropriate music.
Alongside the environment, the customers’ experience with the product is also critical. To address this issue, Starbucks allows customers to customize their drink however they would like with different coffees, milk, syrup flavors, etc. This gives the customer full range to create their own drink in addition to the company’s menu packed with favorite specialty drinks and food. Starbucks guarantees satisfaction by allowing customers to have their drink made again if they do not like it. The company recognizes the need for a good reputation and that many times the best marketing is achieved by “word of mouth” advertising directly from the customers.
Innovation based on technology is also a big strength of Starbucks. They were one of the first companies to offer free wireless Internet for their customers (CNBC Business, 2011). Going back to the idea of the “third place”, it creates an environment where people want to stay and do work, study, or surf the web. Along with this, they offer a free song download from iTunes weekly, in order to get people in their stores and using their facilities. Another huge technological breakthrough for the company is the new use of smart phones for payment. Customers can download an application, enter their gift cards and Starbucks rewards, and use their phone to pay for their purchases at the register. Again, Starbucks is ahead of its competitors who do not offer such services.
While Starbucks Corporation has many strengths that contribute to its success, the intangible resource of the brand name is its greatest distinctive competency. There is no doubt that the reputation of the Starbucks brand has contributed to the company’s wide success. When the company expands internationally, or even domestically, the customers can recognize the brand and expect a certain level of quality. People have confidence that no matter where in the world they go, they can trust that they will get the same, consistent product and service from Starbucks. Next to huge brands such as McDonalds, Coca-Cola, and Google, Starbucks is also one of the most globally recognized brands. This brand is a huge barrier to imitation for its competition, making it the company’s most valuable competency.
While Starbucks’ quality, innovation, and customer responsiveness all contribute to its competitive advantage, the company often falls short in respect to efficiency. Because Starbucks’ business-level strategy is focused on differentiation, efficiency could be considered one of their potential weaknesses. While their goal may be to lower cost, they still need to provide the highest quality that their customer expects. For a long time customers were willing to pay a little more for their coffee; however, competitors are starting to use some of Starbucks strategies while offering a lower price. Companies such as McDonalds are now offering similar services by renovating many of their stores, adding free Wi-Fi, etc. to create a more pleasant environment. To combat this competition, the company must continue to be innovative and resourceful.
Over the past few years, poor efficiency for Starbucks can also be found in their high saturation of stores within the United States (Adamy, 2007). Domestically, the company has over 12,000 company owned and licensed stores (Starbucks Corporation, 2012). Because of the high saturation of their own company, some stores are actually hindering the profitability of other stores. For example, in their hometown of Seattle there are often stores right across the road from each other often cannibalizing the older stores (Adamy, 2007). This inefficiency within the store distribution makes it more costly, especially in times of economic downturn when customers may sacrifice the higher quality for lower prices.