Strategic Management Analysis: Starbucks

Starbucks

Introduction – Background

Starbucks. A name that surely rings a bell in the minds of people all around the world. Afterall, they have successfully built their brand globally, gaining a lot of fame. Most people know Starbucks as a company that sells coffee. While it is true, that is but the surface. Starbucks is in fact, in a coffee house chain business. As a coffee house business, they naturally offer not only coffees but a full coffee house experience with fine selection of teas, pastries, and other delicacies alongside coffees. However, people tend to mistake them as a coffee business. Regardless, as of now, they are a hugely successful multinational chain of coffee houses and roastery. As for their rise to the top in the industry, their tale, shall be told as follows.

Starbucks was founded during the year 1971 in Seattle by Jerry Baldwin, Gordon Bowker, and Zev Siegl. In the beginning, they started strictly as a coffee and equipment seller. In 1980, Zev Siegl left Starbucks to pursue his other interest. In 1982, a man called Howard Schultz joined Starbucks as a director of retail stores and marketing. During a trip to Milan, he was impressed by the popularity of espresso bars, it inspired him to do the same as he saw the potential of opening similar coffeehouse chain back in Seattle. He tried to convince Baldwin and Bowker of the coffee house concept however, it was futile as his suggestion fell on deaf ears. He then left Starbucks and started his own coffee house chain business called II Giornale which turned out to be a success as it was able to expand into multiple cities quickly. In 1987, Jerry Baldwin and Gordon Bowker decided to sell Starbucks. Aware of this, Howard Schultz immediately bought Starbucks and integrated all his operations under the Starbucks brand. He revamped Starbucks’ business model and turned it into a coffee house or café model for the business along with additional sales of coffee beans, equipment, and other items. Howard Schultz led Starbucks to a new and prosperous era. With the revolutionized business model, Starbucks quickly expanded its business. They started opening stores outside North America in the 1996 and soon after they became the largest coffee house chain in the world.

Introduction – Market and Consumer Segments

As of now, Starbucks presence can be felt in all over the world with over 30,000 stores all across the globe in 80 different countries / market. Starbucks can mostly be found in an urban area with a lot of foot traffic as well as big cities since it is their targeted geographic consumer segment. Demographic wise, their targeted consumer segments are with high income and high spending irrelevant of age and gender. Behaviourally, they target people who are usually busy or the so called on the go people and loyal people to be their regular customers. As for psychographic, they target people who are aware and mindful of their social status, which are most often middle and upper classes.

Introduction – Products

Regarding products, Starbucks currently maintain its focus as a coffee house business which means they sell coffee first and foremost. However, they have expanded their products to a lot more than just coffee. Now, they sell coffee beans, other kinds of beverages along with coffees, foods like pastries and other delicacies, coffee brewing equipment, custom Starbucks mugs and tumblers, along with ready to drink bottled beverages.

Introduction – Competitors

Now then, moving on to competitors, because they are a coffee house not just a coffee business, their competitors are not strictly limited to coffee and coffee house chain businesses but also restaurant, bars, and café chains. After all, they are selling not only the coffee but also a place that provides experience and enjoyment for the time spent in the particular place which is also something that other chains have to offer. Thus, some of the big competitors they compete with are the likes of McDonalds, KFC, Costa, Dunkin Donuts, and else.

Introduction – Philosophy

Like every other huge and successful companies, Starbucks has their own vision and mission that they adhere to.

Mission

To inspire and nurture the human spirit – one person, one cup, and one neighbourhood    at a time.

Values

• Creating a culture of warmth and belonging, where everyone is welcome.
• Acting with courage, challenging the status quo and finding new ways to grow our company and each other.
• Being present, connecting with transparency, dignity and respect.
• Delivering our very best in all we do, holding ourselves accountable for results.

Vision

To be the best coffee house, offering only the best, while sticking to the values and principles of family culture

The fundamental essence of Starbucks’ philosophy is an emphasis on family culture. As expressed by their values, they hold family culture in high regards which is why they try to create a culture of warmth and belonging to welcome everyone and also an emphasis in the human spirit of togetherness as stated in their mission. True to their philosophy, Starbucks always strive to provide a full coffee house experience where people can gather to get along, chat, and work. As well as engaging their customers. This family culture, however, is not only limited to their customers but also to their partners and in particular their employees which they consider a partner. It is in the best interest of Starbucks to treat their employees with the same respect and dignity that they show to their customers. Afterall, the employees are at the heart of the Starbucks experience. Naturally, these ideals are followed up by concrete actions. As a token of sincerity, Starbucks offer programs for their partners such as; comprehensive health coverage for both full and part time partners, access to full college tuition coverage through the Starbucks College Achievement Plan, and equity in the company through Bean stock.

Introduction – Marketing Extent

Despite the success that they have enjoyed, Starbucks kept on going strong with their marketing activities spending a lot of money on marketing and making use of the advanced digital era to improve their marketing depth and range. Afterall, marketing has always been a key for success. As for Starbucks themselves, what they try to communicate the most is their brand, their “Starbucks experience”, as well as their philosophy. Everything in order to build a strong brand recognition and loyalty in the minds and hearts of their consumers.

This shall be where my introduction ends.

Competitive Dynamics

First, we shall define competitive dynamics as a set of actions and reactions in a competitive business environment that firms display, which will affect competitive advantage of firms involved.

Competition is inevitable in an industry as saturated as this food chain industry. As a coffee house chain, the competition that Starbucks faces are not limited to other coffee house chain but also to all food chains such as restaurant and bars. After all, their consumer segments may overlap with each other. Now then here are some of their big competitors, which includes the likes of McDonalds, KFC, Costa, and Dunkin Donuts.

KFC and McDonalds are one of the biggest restaurant chains in the world, meanwhile Dunkin Donuts are even more similar to Starbucks as a coffee house chain. In fact, if we are strictly speaking of coffee house, then Costa would be Starbucks’ biggest rival as they are the second largest coffee house chain in the world after Starbucks.

Starbucks in order to survive in this harsh competitive environment, they will need some kind of competitive advantage. These are how they obtain those competitive advantages.

First of all, Starbucks innovate. Compared to their competitors, they are considered as one of the earliest companies to adapt a seasonal tweak on their products where they provide different variations or new products during festive seasons such as Christmas. They also tend to offer a product unique to a country such as during cherry blossom season in Japan. The innovation is not strictly limited to their coffee and other beverages but also to their merchandise such as cards and tumblers.

Second, its about flexibility. Starbucks is very flexible, they read the changes in customer taste and preferences and are open to adapt to it. It can be seen from their introduction to non-dairy milk products, but it is most evident from Starbucks’ attempt in China’s market which heavily revolves around tea-drinking. They willingly shifted to offering teas with traditional Chinese tea while slowly introducing coffee drinking alongside it.

Third, Starbucks’ experience is something that is different from the experience that their competitors have to offer. Starbucks’ does the best to make you feel at home as a part of the Starbucks family. It is something that most other food chains including the big ones like KFC and McDonalds are lacking. While other coffee house chains might follow suit, the extend of it is not as far as Starbucks.

Finally, Starbucks value loyalty and they expect loyalty in return from their family environment and experience. But, one of the concrete ways in which they try to gain the loyalty of their customers is through their reward program. They have a Starbucks rewards card which give benefits for the card holders and this way they ensure that they will come back again and again. While this may be adapted but their competitors, the reality is not every competitor including the big ones like KFC and McDonald does it. Even when other competitor does it, its not as effective because Starbucks already has a strong brand which in itself is perhaps the greatest asset that gives a competitive edge.

International Entry

When a company or a brand wants to go global then they have to choose an entry mode. There are a variety of entry modes such as exporting, franchising, licensing, joint venture, and foreign direct investment.

In a brief, exporting can be defined as the act of selling domestic products to foreign countries. Franchising can be defined as a relationship in which a party called the franchisor gives the right to another party called the franchisee to establish and develop the franchisor’s business. Licensing, a relationship in which a party called the licensor gives the other party called the licensee a right to use their trademark. Joint venture is where two companies decided to work together towards a same goal by pooling their resource together. Foreign direct investment is when a company directly invest into a business located in another country.

Now that we know of the various entry modes, it will help in understanding Starbucks’ entry mode of choice. Starbucks themselves, since they belong in a coffee house chain business and they want to open a lot of stores, they will naturally choose franchising or licensing or even both. However, in reality, they mostly do licensing. They allow people to sign up for a license in their own website. This is because they position themselves as a premium business that requires intensive preparations, educated staff, and the ability for the stores to replicate the atmosphere also known as the Starbucks experience. Franchise poses a risk to the Starbucks brand whereas License does not, provided that they give their supports to their licensee. Here is what Starbucks CEO said.

Starbucks CEO, Howard Schultz in 2003 said “We believed very early on that people’s interaction with the Starbucks experience was going to determine the success of the brand. The culture and values of how we related to our customers, which is reflected in how the company relates to our [employees], would determine our success. And we thought the best way to have those kinds of universal values was to build around company-owned stores and then to provide stock options to every employee, to give them a financial and psychological stake in the company.”

“I always viewed franchising as a way to get access to capital, because you’re using other people’s money to grow, essentially. And we were dealing with a premium product — something that can be hard to learn, that you have to explain to the customer, that requires an educated staff. It would have been hard to provide the level of sensitivity to customers and knowledge of the product needed to create those Starbucks values if we franchised. You can be just as entrepreneurial and experimental in a company-owned model.”

Aside from that, in some cases, Starbucks does joint venture as well. In fact, in order to break through the Chinese market, they chose to do a joint venture with Chinese firm to gain a foothold in the Chinese market. Afterwards, they proceed to buy out the joint venture in order to absorb all the profits for themselves instead of sharing it with their partner.

International Opportunities

Jumping on international opportunities is necessary for a business to grow. Entering new markets will allow them to increase their market size. The bigger your market the more customers you would have, the more sales you would make, and the more revenue you would get. Obviously, Starbucks is aware of this since they themselves have already expanded to around 80 markets all across the world with more than 30000 stores. They even managed to break through the Chinese market. You might be wondering what other international opportunities are left for them. Well, they could still try to improve and strengthen their market share in some countries, and there are some countries in which they failed as well. So, there are still international opportunities left up for grab.

Let us begin with how they failed in this particular huge coffee market, Australia.

First of all, they failed to adapt to the Australian market. This is uncharacteristic of Starbucks. They are known to be able to be flexible and adapt well. Yet, they failed in the Australian market because they did not adapt. The coffee that they offered were apparently too sweet for the taste and preferences of the Australians. They most likely did not prepare well by doing some market research of the Australian coffee culture. It is also probable that they thought Australian shares the same taste and preference as the American consumers.

Secondly, they did not have the patience. When they entered the Australian market, they did not have the patience to wait for their brand to slowly integrate and resonate with the Australian market. Instead, they tried to grow as fast as possible by opening multiple stores in multiple locations. The Australian were then deprived of the feeling of want for Starbucks.

Finally, there were already many existing coffee houses in Australia. The coffee house industry in Australia were already blooming and Starbucks were late to the party. However, what they did wrong was that they did not study their new environment and their competitors. The Australians did not fancy Starbucks because they are different to the existing coffee house in Australia. From the taste to the execution of the business. Even though supposedly Starbucks have the family culture which should resonate well with the Australian, in reality, it did not, and that is because they did not integrate Starbucks to the market properly.

Another opportunity is to strengthen their hold in the markets that they have entered. There are three countries with huge population, decent buying power, drink coffee, love sweets, and loves a place to gather. China, India, and Indonesia. The huge population means that there is huge potential market up for grasp. The population of those countries are also considered consumptive in nature. Coffees and other sweet beverages and snacks are perfect for their taste and preferences. While China may not drink a lot of coffee, India and Indonesia does. Then again, the three countries love a place to gather to which mean Starbucks can be one of those places where the people can gather. All those traits make them the perfect market for Starbucks to strengthen their hold and gain bigger market share. Obviously, there are other markets where they could strengthen their position but those 3 are ideal.

Risk in International Environment

When a company goes global, they will face certain risks or threats which are usually classified into 6 categories which includes political, economic, socio-cultural, technology, legal, and environment. Those threats or risks obviously applies to Starbucks as well. In general, most business regardless of their field, carries the same external risks or threats when trying to go global. When entering a foreign market, they will have to perform an external analysis which is usually done through PESTLE analysis. Below are some PESTLE considerations for Starbucks in entering a new market.

First up, political risks or threats. This is related to the political stability of the country. When a country is politically unstable, there will be disruption on the day to day activities and economy which will be harmful for a business. Starbucks like any other companies would definitely avoid entering a politically unstable country. One other thing to note is that Starbucks is not a political organisation so, they do not lean towards any political faction. This also allow them to avoid being pulled in a political conflict between different countries which would then hinder their business.

Next up, economic risks or threats. It is quite obvious that economy matters after all it affects business directly. Starbucks will assess the health of the economy, its growth, potential market, profitability, and tax level. Starbucks will obviously avoid country that does not have sufficient buying power considering their targeted market and consumer segments.

Then we have socio-cultural. This is a rather subtle issue. Sometimes the values and principles of the targeted country will clash with the company and its product. Therefore, it is a risk since it hinders the business operation. For example, Starbucks had to change their logo in Arab to better fit their culture.

Technological. The crucial thing here is the availability and serviceability of the technological infrastructure in the targeted countries. For example, Starbucks is all about the coffee house experience and comfortability. In this day and age, it depends on internet. In fact, the availability of wi-fi is one of the things that plays a huge role in attracting consumers. In an underdeveloped country with limited technological infrastructure that does not allow this kind of technology, it would be a bad choice for Starbucks to enter to.

Legal. Now, this is also an obvious risks or threats. Different countries will have different laws and regulations to follow. Starbucks will have to learn about it and assess whether or not it is favourable for them before entering the market.

Lastly, environmental. This issue is growing as people are becoming more aware and mindful of their environment. Fortunately, Starbucks themselves are committed to preserving the environment. So, in order to keep their brand image and the consumers’ trust on them regarding preservation of environment they will have to enter foreign markets that are environmentally friendly.

Those are some fundamental things that they should consider regarding external risks or threats via PESTLE analysis.

Summary

Starbucks is a coffee house chain business that was founded in 1971 in Seattle by Jerry Baldwin, Gordon Bowker, and Zev Siegl. However, only after Howard Schultz took over and revamped their business model did, they start to prosper. Nowadays, they are the biggest coffee chain business in the world with over 30000 stores in 80 different markets all around the world. Their products range from coffees, teas, other beverages, coffee making equipment, pastries and other delicacies, and ready to drink beverages. They are also well known for their family culture philosophy which are expressed through their vision, mission, and values. It is also proven by their action in how they treat their business, customer, and partners.

Belonging in a food chain industry, they have plenty of competitors that are not limited only to coffee house chains. Some of their biggest competitors are the likes of McDonalds, KFC, Dunkin Donuts, and Costa. In order to survive in the harsh competitive landscape and even win, they need to gain some competitive advantages. Which they obtained through innovation, flexibility, unique experience offered, and loyalty development program.

When it comes to entering a new market, out of the various ways in which they could enter a market, they chose licensing and joint venture. They chose those methods because they wanted to have some control over the business in order to ensure that all stores can offer the same Starbucks experience and avoid their brand image to be ruined. Meanwhile, they tried joint venture on some occasions such as when they tried to enter a more difficult market that is China.

Even with their global presence, there are still international opportunities left for them to take on. They could try to re-enter the markets in which they failed and improve it such as the Australian market. They could also try to strengthen their position in the markets that they are currently in and look towards increasing their market shares in those markets. Three standout markets would be China, India, and Indonesia. Those three markets have traits that are perfect for Starbucks to target.

Still, they have to bear in mind that going international also carries risks and threats which are also known as external threats. The external factors are political, economic, socio-cultural, technological, legal, and environmental. They have to assess the risks and threats of those matters when they want to enter a foreign market. The analysis can be done through PESTLE analysis which covers all the factors.

Suggestion

Starbucks is already at the top of the coffee chain industry. They have a strong brand reputation and the loyalty of their customers. They should obviously keep up what they are doing. If I were to suggest anything, it would be as follows:

• They have to strengthen their position, increase their market share in huge developing market such as China, India, and Indonesia, once the markets have developed, they can reap their bounty.
• They have so many stores and I think it would be great if they can make sure that all the stores are up to standards and can offer the full Starbucks experience.
• Trends in beverages tends to be fickle therefore, they should always keep track of the changes in trends and adapt their product offerings
• Let alone the food chain industry, even the coffee house chain industry alone is saturated already. They need to find ways to innovate not only their products but perhaps their service, their model, or their relationship with their customers and partners. Especially since they are the market leader, they would have some budget and time that can be spared on designing an innovation that would give them an edge over their competitors.

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