The Contingency Theory Of Management

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Starbucks has evolved one of the fastest flourishing companies in the United States. Starting from 1992, the company's net revenue improved at a compounded growth rate of 20%, to $3.3 billion in fiscal 2002. Gross earnings have grown at an annual compounded growth rate of 30% to $218 million in fiscal 2002, which is the highest figure in net earning of company's history (See Exhib it 1). As Business Week tells it:

On Wall Street, Starbucks comes last biggest growth story. Its stock, including four splits, has raised more than 2,200% over the previous decade, surpassing Wal-Mart, General Electric, PepsiCo, Coca-Cola, Microsoft, and IBM in aggregated return. Now at $21 [September 2002], it is hovering near its all-time high of $23 in July [2002], before the overall marked drop.

1 To continue this rapid pace of growth, the firm's senior executives are looking to expand internationally. Specifically, they are interested in further expansion in Europe (including the Middle East), Asia Pacific (including Australia and New Zealand) and Latin America. Expanding in these three continents represents both a challenge and an opportunity to Starbucks. While the opportunity of increased revenues from further expansion is readily apparent to the company's top management, what is not clear is how to deal with growing "anti-globalization" sentiment around the world.

This case looks at issues that are arising as Starbucks starts to dominate coffee markets around the world and explores the changes which might be required in strategy.

The 25-year goal of the company is to be an enduring, and great company with the utmost respected and recognized brand in the world, known for inspiring and nurturing the human sprit. The mission statement of the company is to articulate several guiding principles to gauge the appropriateness of firm's decision. In describing Starbucks' genuine approach towards competition, Fortune notes:

The strategy is straightforward: Blanket an area altogether, even if the stores cannibalize each other's business. A new store will often manage to capture approximately 30% of the sales of a nearby Starbucks, but the company takes this as a good thing: The everywhere approach of the Starbucks cuts down the costs management and delivery, it decreases the customer lines at individual stores, and increases foot traffic for all the stores in an area.

Last week 20 million people purchased a cup of coffee at a Starbucks. No American retailer has a highest number of customer visit. A typical customer stops by 18 times a month; since the company went public, It has climbed an average of 20% a year. Even in down economy, Starbucks traffics have risen between 6 to 8 percent a year. Perhaps even most noticeable fact that Starbucks has managed to produce those kinds of the numbers with virtually no marketing by giving just one percent of annual income on advertising. For several

years, Observers have found that US coffee-bar market may be approaching towards saturation. They point to marked consolidation, as bigger players of coffee bar snap up some of the smaller coffee bar competitors. More, they take a note that Starbucks' store base is too maturing, and reaching to slowdown in the growth of unit volume and firm profit. In the response of that, some point, Starbucks has changed its direction towards foreign markets for the continued growth. For example Business Week notes:

To compensate the wavering returns of its first decade, Starbucks has no choice but to export its concept vigorously. Indeed some observers give Starbucks only 2 years maximum before it saturates the U.S. market. The chain now [in August 2002] operates 1200 international outlets, from Beijing to Bristol. This gives huge room for grow. Infact, approximately 400 or its planned 1200 new stores in this year would be constructed overseas, which will represent a 35% rise in its foreign base. Starbucks hopes to double the quantity of its stores globally, to about 10,000 in 3 year period.

Our attitude towards international expansion is to put focus first on the partnership, and country second. We believe in local connection to acquire everything up and working. Finding the correct local partners is the key to negotiate local regulations and others problems. We search for partners who are common in our values, culture, and motives about community development. We are basically interested in partners who could guide us in the process of initiation in foreign location. We are searching the firms with: (1) common philosophy to ours in terms of shared values, corporate citizenship, and commitment to be in the business for long haul, (2) experience with multi-unit restaurant, (3) For the prevention of imitators, having resources to expand the Starbucks concept rapidly., (4) To pick prime real estate locations, having strong real-estate experience along with knowledge, (5) Must be having knowledge of retail market, and (6) commitment of the people should be available to our project.

In an international joint venture, it is the partner that chooses store sites, does all the preparatory and selection work, which are then submitted for approval to Starbucks. Cydnie Horwat, VP for International Assets Development Systems and Infrastructure, elaborates how a Starbucks market entry plan initiates with brand building, which afterwards facilitates further rapid expansion in a country:

When entering a market first, we look for different things in the initial 1 to 3 years than later on. During these early years we are developing our brand. Our stores are the largest source of advertising, as they don't do a lot of separate advertising. Therefore we possess higher investment in stores in the first 3 years. Approximately sixty to seventy percent of stores which are opened in these initial 3 years are our biggest brand-builders.

Before 10 years, we had 125 stores and 2000 employees. Today we have 62,000 employees working in thirty different countries outside of North America, who are serving about 22 million customers in a week. Our core customer comes approximately eighteen times a month. With the majority of adults throughout glob drinking 2 cups of coffee a day and with Starbucks having less than seven percent share of aggregate coffee consumption in the U.S. and less than one percent globally, these are the initial days for the growth and progress of company. We have got a model that is quite well tested from market to market.

Starbucks is good on its path to become a global brand. According to Business Week:

[T]he Starbucks name and image is associated with millions of people around the world who consume its products. In Business Week survey of the top hindered international brands published in August 5 [2002] It came one of the rapidly growing brands. At a time when one corporate star after another has collapsed to earth, brought down by revelations of earnings misstatements, executive greed, or worse, Starbucks has not faultered. But being a international company is not risk free. As Business Week points out,

Global expansion carries a big risk for Starbucks. For one thing, it makes decreased money one every overseas store as most of them are operated with local partners. While this makes easier to begin on foreign turf, it decreases company's share of the profits to only 20 to 50 percent.

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