Starbucks Coffee Company has established as its own market and artistry in the Coffee gastronomy line for more than 30 years. Providing over 60 types of coffee, Starbucks has kept the name and brand alive since 1987 where a small and friendly workforce aim to create national brand – The Starbucks Experience. Jerry Baldwin, Zev Seigl, Gordon Bowker and Zev Siegl were the ones who opened the first Starbucks in Washington in the year 1971. They sold high-quality coffee beans and equipment. The name “Starbucks” was named after the chief mate of a whaling boat, Pequod, Starbuck. The company started out by only selling roasted coffee and not brewed coffee.
The coffee was bought directly from plantations. Through the rise and fall, but rise again, the vitality of Starbucks achievements lies on attributes beyond strategic management practices. “It’s not about the Coffee; it’s about the people behind the Coffee.” – as quoted by Howard Schultz the CEO of Starbucks. There were issues with the strategic management process in Starbucks. During Howard Schultz return as a CEO, he has implemented 3 strategic initiatives to increase the sales annually. The 3 strategies is to help improve the current state of the US coffee retail business, to build Starbucks own experience such as the ambience in the shop and lastly is to look into the organization structure such has improving on customer service and reducing cost. The importance for an approach of customer service and right leadership principles are the one that can help the company succeed.
Porter’s Five Forces Analysis
The strategy management process is a series of analyses that assists company to develop a strategy that generates competitive advantages (Barney and Hesterly 2012: 22). External analysis is one of the important analyses to identify the critical threats and opportunities in its competitive environment (Barney and Hesterly 2012: 26). The “five force framework” is one of the most influential that developed by Professor Michael Porter of Harvard Business School. The five forces framework identifies five most common threats that firms are facing in the local competitive environment. (Barney and Hesterly 2012: 52). Environment threat is any individual, group, or organization outside a firm that seeks to reduce the level of that firm’s performance. Threats increase a firm’s costs, decrease a firm’s revenues, or in other ways reduce a firm’s performance (Barney and Hesterly 2012: 54). The “five force framework” suggested the five most common environment threats are (Barney and Hesterly 2012: 54); i.The threat of entry.
ii.The threat of rivalry.
iii.The threat of substitutes.
iv.The threat of suppliers.
v.The threat of buyers.
The Threat of Entry
New entrant refer to firm that has recently started its operation or threaten that will begin soon (Barney and Hesterly 2012:54). In a recent article published by Timeout Singapore revealed the eight new cafes in Singapore are worth to visit (Timeout Singapore 2012). One of the reasons motivated new entrances is its superior profits that Starbucks is earning (Barney and Hesterly 2012: 54). The threat of entry depends on the cost of entry or existence barriers. The “five forces framework” identified four important barriers. There are (Barney and Hesterly 2012: 56). i.Economies of scale.
iii.Cost advantages independent of scale.
iv.Government regulation of entry.
Economies of scale
Economies of scale exist in an industry when a firm’s costs as a function of its volume of production. As Starbucks is a chained Cafes and has 84 cafes island wide (Starbucks 2011a), as such Starbuck does enjoy advantages on the economies of scale. Product Difference
Brand identification and customer loyalty serve as entry barriers to new entrant (Barney and Hesterley 2012: 58). Starbucks set out to be a traditional Italian coffee bar that practises Italian style of packaging likes Venti, Cost advantages independent of scale
Incumbent firms may have a whole range of cost advantage, independent of economies of scale compared to new entrants. One of the cost advantages is learning-curve cost advantages that potential does not enjoy (Barney and Hesterley 2012: 58)
Starbucks offers Starbucks card that for loyalty customers to enjoy rewards. Government policy as a barrier to entry Government, for their own reasons, may decide to increase the cost of entry into an industry (Barney and Hesterly 2012: 60). As cafes is a labour intensive industry, therefor the recent tightening inflow of foreign workers may increase the cost of entry due to Singapore government decided not to continue to rely on low-cost foreign labour (Today online 2012) The Threat of Rivalry
Rivalry threatens firms by reducing their economic profits. High level of rivalry is indicated by such action as frequent price cutting by firm (Barney and Hesterly 2012:60). With this respect, the Starbucks had offered a 1 for 1 promotion to retain its customer due to the strong competition in Singapore (Made in Singapore Lah 2010). One of the reasons attribute to high rivalry is due to the slow grow of the industry (Barney and Hesterly2012:61), this can be certain by a recent report revealed by Euromonitor International concludes that the beverage industry in Singapore has been saturated (Euromonitor International 2012)
The Threat of Substitutes
Starbucks is encountering threat of substitute as its competitor offers the approximately customer needs in the same ways (Barney and Hesterly 2012: 60). The Coffee Bean and Tea Leaf offers similar product and services and both are under chained Western-style specialised coffee shop Gloria Jean’s coffee
The Threat of Powerful Supplier
Supplier can threaten the performance of firms in an industry by increasing the price of their supplier or by reducing the quality of that supplier if a supplier is offering a highly differentiated product (Barney and Hesterly 2012: 62). However, Starbucks is sourcing its main ingredient, the coffee berries
The Threat of Powerful Buyers
Powerful buyers act to decrease a firm revenues and if a business only has s mall number of buyer, these buyers can be very threatening. However, if a firm can offer a very different product, the threaten from the buyers can be reduced significantly ( Barney and Hesterly 2012: 64).
Business Level Strategy
Starbucks product cost are relatively higher compared to its competitors with similar substitute of product. But due to the excellence in ambience, quality and customer service, they have become the world top coffee chain. Reducing the motion, making an improvements with customer satisfaction by interacting with them and reducing the time spend on making a drink by an employee can achieve cost effective effect despite having to employ more employees. Being the top coffee chain and having the best coffee culture in the world, many coffee exporters are interested in becoming their suppliers. Starbucks focus on serving top quality and reasonable price coffee to the coffee drinker/lovers. By having a good record of relationships with the suppliers; they were given special transportation rates and it helps them to be able to reduce their time on sourcing for the top quality beans and having to receive good rates when purchasing the top quality beans. It also helps to reduce the company expenses by receiving cheaper rates in transportation. The inflation in economy has causes Starbucks to brainstorm on its pricing strategies. To compete with its competitors, such as its long term competitor Costa coffee, they increased their prices slowly over the years. They had also stabilized their prices by having surveys based on customers pricing satisfaction.
Starbucks and Costa coffee are long term rivals in the coffee industry. However the individual has their own differentiation in adhering to different consumers needs. Costa Coffee strategy is to make its coffee convenient for the consumers. Therefore they have work with coffee nation to implement vending machines in various areas, such as subway stations. Having these machines can cater to busy consumers with a one stop convenience access to a cup of coffee. Their aim is to achieve high volume of customer base with low profit margin. Starbucks strategy is to provide its customers with top notch quality coffee. Although their coffee price is expensive, they are using unique and exquisite coffee whereby other coffee chains are unable to compete with. In conclusion, Starbucks focus on providing the consumers with high quality rare taste of coffee and they are focusing on their branding. In other hand, Costa coffee aims to maximize their profits. (http://manifestedmarketing.com/2011/03/07/costa-coffee-vs-starbucks-differentiation/
Recommendations to enhance Starbucks competitive position
Current Business Strategy Undertaken – Corporate Diversification Starbucks acquired Bay Bread and its La Boulange brand for $100 million While food being currently served at the stores are mainly pastries, Starbucks is looking into providing a better dining experience for the customers by acquiring Bay Bread and its La Boulange brand (WDM Group 2012). This acquisition will enable Starbucks to roll out new products from the La Boulange’s menu, adding on to the current 19 per cent of food revenue that Starbucks rakes in (Bloomberg L.P. 2012). Apart from the usual Frappucino and Lattes you get at the famous coffeehouse now, one can expect food from the La Boulange menu. Diversifying the business this way, Starbucks is able to work on its competitive position through providing better meals and its existing beverages to Starbucks lovers, rendering it a one-stop meal and coffee provider. Starbucks and Via
Garnering a pie of the market share of $20 billion globally, Starbucks tapped into the market of instant coffee in 2009. The Via line consists a variety of instant coffee that one could easily make at home. Figure X.X shows us how Via has managed to tap into the word of instant coffee in the U.S, taking 1.6% of the market in 2011.
Figure X.X US instant coffee – market share by manufacturer (Source: Mintel 2011)
Starbucks and Verismo
In October 2012, Starbucks launched their first coffee machine, Verismo. Revolutionising the coffee industry once again, coffee aficionados can now make their own Starbucks at home. With Starbucks’s introduction of their very own coffee machine, customers now have the option of preparing their own cuppa at home without making a trip to a Starbucks joint. The introduction of Verismo allows Starbucks to tap into the coffee machine industry, competing with marvels specialising in coffee-makers such as Nestle and Green Mountain. In an article by Thomson Reuters (2012), it’s said that the launch of Verismo is likely to affect the sales of Nespresso by Nestle and the Kuerig machine by Green Mountain.
Figure X.X Starbucks Verismo 580 Brewer in Burgundy (Source: Starbucks Corporation 2012) Suggestions on Enhancing Starbucks Competitive Position
As we have discussed earlier, Starbucks is known for taking on corporate diversification as their business strategy. Today, businesses are constantly employing diversification to pave the way towards other profit-making opportunities. Whilst product diversification may appear to be the most feasible method to undertake for an organisation to explore other lucrative opportunities, it is important for a business to carefully plot this strategy by seeking new product or service which is related to the core product or service. Investing in another product/service of a different nature may cause the organisation to lose business focus and brand image, which may result in generating confusion among their target market and/or customers. Increase Expansion Internationally
Starbucks may consider directing their focus on expanding internationally instead of opening up new stores in the states. As of 16 November 2012, there are 13123 stores in the US with only 7243 stores worldwide operating outside the United States (Loxcel 2012). It may seem that the United States is a great market for coffee businesses to tap into because of the number of existing Starbucks stores, the states is however not listed as one of the top five countries with the most coffee consumption (Splashpress Media 2012). Countries like Finland, Norway, Iceland, Denmark and Netherlands prove to bear more potential market share as compared to the United States. By directing its focus on tapping into these countries, Starbucks may hence gain a better position internationally. Figure X.X shows us where Starbucks stores are located geographically.
Figure X.X Starbucks stores worldwide (Source: Loxcel 2012)
Rent out meeting space and venue for private events
Starbucks is known to be a meeting point for most people. Be it talking about business, revising schoolwork together, it is a great place for friends and families to gather at. Starbucks may capitalise on the fact that many enjoy the ambience and rent out meeting space to companies who prefer to have their meetings hosted outside of the office. One thing to take into consideration here is that Starbucks has to offer free wi-fi access to customers who host their business meetings with them. While parties can be held at some bars, Starbucks can consider becoming a venue which people could throw their private events at. Separating itself as a coffee joint from the usual bars and restaurants, this could be a differentiation tactic that Starbucks can take on to attract customers who wish to have their private parties hosted with them. Continual Improvement on Core Product
Starbucks should continue to improve on its core product – in this context, coffee and/or other beverages sold in the stores. However lucrative both Via and Verismo may prove to be, the organisation must still be recognised and associated with coffee (that is served within the premise). To maintain the quality of their coffee, Starbucks should always look into improving their brewing systems and practices. The business could look into exploiting different suppliers for better quality beans, renovating the stores (so as to better provide better comfort to its customers) and exploring state-of-the-art coffee machinery.