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Consider the roles of Directors in corporations. What was their responsibility in this strategy? What actions should they have taken?
Starbucks is one of the most successful companies in the world. It has started with a single coffee shop in Seattle since 1971. Afterwards, the company started to expand its business internationally, including Australia (Zhenjia, 2006). However, Starbucks failed to operate successfully in Australia due to a number of reasons and it suddenly had to close 61 of its 84 Australian stores which cost a huge loss to the company (Emerson, 2008). This failure of Starbucks demonstrates the reckless performance of its directors in making a decision to expand its business in other countries.
Directors are essential for every limited company regardless of their sizes. Even though the limited company is majorly owned by a number of shareholders, but the directors are the one who running and leading the company whether to achieve or fail to reach the expected companys goals. This essay is going to discuss about the main roles and responsibilities of directors in corporations and identify which roles and responsibilities are lacked by Starbucks directors. Finally, what actions should Starbucks directors have taken are summarized.
Directors are named as directors because their duties are to direct their enterprise and ensure that their enterprise is moving towards the right direction (Shultz, 2001). Directors play an important role in formulating strategic plan of the company, making a critical decision strategically which can impact the future business of the company. On top of all, the remarkable responsibility that every director should have is to protect the stakeholders interests (Shakweh, 2010).
The directors have the utmost responsibility to manage their corporate in the way to maximize shareholders wealth and protect stakeholders interests. They have to keep the focus on the long-term shareholder value (Shultz, 2001). However, the failure of Starbucks in expansion into Australia led to enormous loss. The profuse declination of Starbucks stock price, declined by 54 percent from $20.47 in 2007 to $9.44 by the end of 2008, was the result of the closure about 70 percent of its operations in Australia and 600 stores in America (Malhotra, 2011). It caused a loss to company and simultaneously to shareholders. The result explicitly demonstrates that Starbucks directors lacked of the responsibility to maximize shareholders wealth and protect stakeholders profits. This huge loss would not be happened if the principle of protect stakeholders profits and other remarkable roles and responsibilities of directors such as creating, reviewing and adopting the strategic plan, knowing their business and understand its potential, and asking the right questions were underlined and placed in directors mind.
Firstly, directors are responsible for creating, reviewing and adopting strategic plan. Most of successful businesses have formalized strategic plan in place and capably executed it (Roche, 2005). To be successful in business, a roadmap for success is required. The strategic plan assists in providing the direction and focal point for all employees to achieve. It helps various work departments within the organization to align their works with a common targets (OnlineBusAdv.com, 2006). The directors are essence to formulate the strategic plan as they are at the top position of the enterprise which able to perceive the enterprise in its strategic context including the market, the industry, its products and services, its customers, and its competitors (Tricker, 2009).
As such, if the strategic plan was created and adopted by Starbucks, it would help ensure the company to research the Australian market conservatively which should allow the company to aware of how strong in Australians coffee culture has been being and enable the company to measure impact of local culture on companys sales before the company decided and executed the expansion into Australia.
Secondly, directors should understand their business and know its potential. Without understanding of what business directors are in, it is more likely that the business will be aimlessly run, consequently, the company is unable to success (Shultz, 2001). Shultz (2001, P. 156) also argues that you do not need to be an expert, but you need to build the context in which to understand the critical success factors.
This responsibility of directors would allow the company to know its competencies (Roche, 2005). Therefore, the company would develop an effective plan to enhance its strengths, eliminate weaknesses, increase opportunities and reduce threats based on the understanding of its business. If directors were understood the business well and perceived companys potential, Starbucks would be allowed to assess the potential of market share that it could gain in high competitive market like Australia. Afterwards, firm could initiate a strategic plan and implement it in order to compete with rivals and penetrate Australian market effectively based on its assessment prior to its expansion.
Another thing which good directors should do is to ask the right questions. Asking the right questions could ensure the company to run in an expected roadmap. Shultz (2001, P. 158) argues that the artful question that summarizes so much, but has an edge on it that demands an answer. Such questions enabled me to be decisive about our strategic direction and what moves we should and should not take.
If Starbucks directors were asking the right questions, the readiness in expansion into Australia would be considered carefully by such questions as following, what makes you think this approach will work?, where do we go from here?, what if we do not?, and what if we do? (Shultz, 2001) Consequently, the decision to expand its business would be extremely examined in order to ensure that the move towards an expansion would result in a profitable way and to have a reserve plan in place to handle with unexpected circumstances.
As four major roles and responsibilities of good directors were demonstrated i.e. to manage their corporate in the way to maximize shareholders wealth and protect stakeholders interests, to create and adopt the strategic plan, to know their business and understand its potential, and to ask the right questions; the lack of these roles and responsibilities lead to the failure of business activity that causes a considerable loss to the firm as exemplified by Starbucks. Starbucks directors should strictly performing their work towards these roles and responsibilities because it should help in ensuring that the company is managed towards its strategic plan and expected roadmap to achieve its goals, making profit and protecting stakeholders interests.
Where did Schultz go wrong and what should he have done to ensure the expansion into Australia was successful?
Starbucks successfully delivered more than taste of its coffee to American coffee culture by additional serving the Starbucks Experience which, at that time, Americans have never seen before (Schwartz, 2008). The Starbucks Experience is about people, place and product. People are the baristas who are well-trained and capable to make a perfect cup of whatever customer wish. In addition, more importantly, the personal connection between baristas and their customers is greatly emphasized. The place is the design of its store that aim to comfort and provide the relaxation to the customers including the coffee aroma that create the good atmosphere in the coffee shop. Its main products, coffee and coffee beans, are developed and diversified to meet a wide range demand of customers (Schwartz, 2008).
Starbuck Experience transformed an ordinary coffee shop into a social hub, where customers are able to relax and meet friends while enjoying coffee. It quickly made the company successful in America. Subsequently, Howard Schultz decided to expand its business into Australia by dumping what worked successfully in America to Australia (Herron, 2008). However, turned out that one model fits all market philosophy was actually invalidated by Australian market. This essay is going to identify where did Schultz go wrong in his managing director role which lead to the huge loss to the firm and also exhibit the solution to ensure that the loss will be eliminated or, at least, minimized.
Firstly, Schultz did not be a good leader as he failed to persuade subordinates to work towards the path to success. Instead of drive the firm towards success, Schultz made a remarkable loss in introducing Starbucks into Australia which is opposed to leaders who have a good leadership.
Good leaders can drive an organization to achieve the organizations goals though their persuasive ability (Ukpaka, 2009). They must have the ability to govern their workforce and lead their firms towards success. Moreover, the leadership of leaders has a significant impact on the productivity of their workforce. Good leaders tend to be able to gain more productivity out of their workforce than who is not (eStartup.org, 2010). Therefore, Schultz should enhance his leadership skill in order to be able to direct his workforce and organization to the success which would result in a profit to Starbucks stakeholders.
Secondly, the most important part in expansion strategy but failed to be recognized by Schultz was the research on the market that Starbucks would be expanded into. The market research is important because it can make the difference in succeeding or failing in business expansion. In addition, business decision that is made based on good market research can minimize the risk of failure (Morton, 2006).
The market research should allow Starbucks to perceive how the firm will be impacted by the strong Australian coffee culture, what are Australian customers needs, how to adapt its products to align with local culture, what strategies need to be initiated and implemented in order to compete with existed local and international competitors in the market. Proactively researching the market allows the company to make necessary changes to obtain a better outcome (Kotler, 2009). Therefore, Schultz should emphasize the requirement in conducting well and intense market research prior to making a decision to expand Starbucks into Australia in order to minimize the risk of failure, and be able to adapt its business to align with demand of target market to gain a better result of expansion.
The failure in market research led to another bad move of Schultz which was a failure to recognize the important of local culture. Schultz failed to translate his business model across the markets. He managed his Australian stores in the same way which was successfully in America (Palmer, 2008). However, Australia has a strong coffee culture, different from American, which was early developed by Greek and Italian immigrants who established the independent caf? that capable to serve a decent cup of coffee before the coffee chains like Starbucks came in (Patterson, 2010).
Australian consumers, who are drinking-in caf?, prefer a decent cup of strong coffee which is served to their tables in a ceramic cup or glass (Gee, 2005). Conversely, Starbucks Australia still attaches with its old model, its consumers have to line-up, place order and pay at the counter, stand around and wait for the cup of weak-taste coffee and too many of additives that served in paper cup before find a seat to sit down (Gee, 2005).
Therefore, Schultz should adopt the differentiation strategy to differentiate Starbucks products and services from primary American model to align with Australian culture. Starbucks products and services should be adapted to satisfy Australian demand as following examples, its procedure to deliver the product to customers should be changed to table service, enhancing its coffee quality and reducing the additives, using the paper cup for only take away coffee.
The pricing strategy of Starbucks was another wrong step taken by Schultz. Even though the price of Starbucks coffee is more expensive regarding its supersized cup, it still dissatisfies Australian consumers (Patterson, 2010). The size of Starbucks cup, larger than average size served by local caf?, did not benefit the company to charge in higher price. Besides, it caused a drawback to the firm itself as consumers were required to pay more for turning their short coffee break into a drinking competition as the amount of coffee was overabundance (Bravo, 2009).
Hence, Schultz should reduce its products size and simultaneously implement the penetration pricing strategy which is to lower its price than average market price of its competitors in order to magnetize the customers in Australian market. The penetration pricing strategy appropriates with the high competitive market where many brands offer the same products and especially where consumers are price sensitive (Fletcher, 2008).
As the failures in managing directors role of Schultz and his reckless in expansion Starbucks were identified. Also, the solutions, which are improvement of his leadership skill, the proactive market research, the recognition in local culture of market target, the adaptation of Starbucks products and services to meet the local demand through differentiation and penetration pricing strategy, were demonstrated. By perceiving and implementing these solutions, Starbucks would be able to expand and compete with its competitors, and thrive in Australia, a high competitive and strong local culture market.