Starbucks Strategy and Planning Analysis

Starbucks Corporation is a mulitinational coffee chain store first setup in Seattle, Washington, United States. It is the biggest coffeehouse through out the world with more than 17000 restaurants in 55 countries including Australia, U K, New Zealand, Canada, and Brazil. It has more than 128,800 employees. It is the public based industrywhich established by Zev Siegl, Jerry Baldwin and Gordon Bowker in 1971. Other key people which are linked with Starbucks are Howard Schultz (Chairman), Troy Alstead who is President and CEO and Stephen Gillett who is Chief Financial Officer. Starbucks which main products are Whole bean coffee, boxed tea, Bottled beverages, baked good, Merchandise, and Frappuccino beverages. Its incomes for the fiscal year 2010 is US $10.7 Billion.

Brief History of Starbucks

1970s: The first Ever Starbucks established with a name came from Herman Melville’s Mob Dick, a classic American novel.

1980s: The industrialist Howard Schultz attached the Starbucks as a Director of Retail operations and marketing.

1990s: In this term the demand for Starbucks coffee improved so they thought to increase it beyond Seattle.

2000s: Starbucks came with 15,000 restaurants through out world wide.

What is Strategy and Strategic Planning?

Strategy means a plan of action which designed to achieve a particular goals and Strategic planning is an organization’s process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this tactic, including its investment and people.

Why Strategy is Important?

In each field of life there is a road map according to which we work or spend our life to get at the specific targets and goals. Like wise in any business, there needs to be a pre plan for success for a business to b successful. This strategic plan gives the direction for the goal to be achieved. A strategic plan also helps the different work units within the organization to keep themselves with common goals.

Past Strategies of Starbucks (1990-2004)

Mission Statement

In early 1990 the management planed to introduce a mission statement which clearly discribe the company goal and targets so each of the workers could work well and communicate in a better way to customers and investors too, so mission statement is:

“Provide great work environment and treat each other with respect and dignity

Embrace diversity as an essential component in the ay we do business

Apply the highest standard of excellence to the purchasing, roasting and fresh delivery of our coffee

Develop enthusiastically satisfied customers all the time

Contribute to our communities and our environment

Recognize the profitability is essential to our future success”

Innovation Strategy

From the very early Starbucks kept the innovation as its constant value. Schultz brought the place-like-home between the office and home so people would get together at the best quality coffees and teas. After that Starbucks launched an effort with its business partners like PepsiCo for the cold Frappuccino drink. In the year of 1995 Starbucks developed a team named “Stores of the future” to complete a research for the designs of next generation stores and other coffee related concerns. Then this team made four different ideas for the each stage of coffee making. These sorts of innovations made the Starbucks to decrease the enormous cost of store opening. Starbucks also brought the fresh pastries and other food items such as juices, sodas and coffee related machines like Starbucks Barista home espresso machine. Meanwhile they also launched coffee mugs and glasses.C:UsersNew UserDesktopAhmadStrategystar buckse574603984362fed77cb3b8064721dd9.jpg

Quality Strategy

Schultz always kept a keen eye on the quality of the products and services and what the customer expectation from Starbucks. Quality in Starbucks was launched in a very strict manner. Starbucks also banned the smoking inside the shop and ordered its employees to refrain from having perfumed there selves. Starbucks was broadly known for its better quality of product and services.

Howard Schultz

Expansion strategy

In the period of 1993 company brought an expansion strategy based on targeting areas with demographic profiles which is favourable together with the Starbucks’s policy to carry and entertain them.

For each area a big city was selected to work as a central unit like hub where a team would complete the target of opening 20 or more shops in the first 2 years.

Starbucks hired professionals with immense operating and marketing experience in chain store retailing as new area vice presidents. Another strategy was also set up to increase the goodwill of Starbucks brand, which made its target to some extent.

In 1991 Starbucks developed a group of specialists to form a store development process depends upon a six month opening timetable. In which it is asked to build every store in different shape, size and infrastructure.

Cost lessening was also got by centralized buying, by fixed fees for some products and by work under contractors with best cost control practices.

Starbucks expansion strategy depended on a limited number of agreements for region where there is no ability to open its own shops.

Starbucks also opened stores in airports and university campuses by the help of licensed like Marriot Host International and Aramark. Coffee was also started to serve on flights like Horizon Airlines and in United Airlines.

Special sales portion of Starbucks made sales 12.20% of total revenue in 1997.

In 1995 company made its real development with international exposure which was based on two strategies, are as follow:

Enabling local company with retail know how in target region

Creating a joint venture with reputable companies

In 1995 Starbucks International was setup to coordinate the international development, which originally started operations in Hawaii, Japan, Philippines, Taiwan, Korea and Singapore.

IPO and Stock performance

Starbucks had build its foundation till 1992 but now it was set to play a part in the race of developing market, as it was predicted by speciality coffee association oa America that from 1992 to 1999 number of coffee cafes would raise 500 to 10,000.

To stimulate its expansion strategy Starbucks go heat to most successful publicizing in 1992, in result its stock price moved growing from $5.50 in 1992 to $58 till today.

Its stock has been divided four times (1993, 1996 and 2001) to balance its equity among shareholders. These division also prohibited high prices from determining small investors as the share value moved upwards.

Financing

As there was no leading threat from competitors, company was capable to finance its expansion entirely by avoiding debt till 1996 with equity capital and revenues, minimizing its overall cost.

But essential for high degree financing forced Schultz in 1996 to understand the significance of debt and take it as lawful option to meet the need of market extension. Star bucks infrastructure for growth strategy was to increase the profits in same series by growing the no of stores which was clearly shown by its financial statement.

Starbucks managed its foremost expansion stages across us in 1992-93 and overseas in 1995 by deviating to debt. High P/E ratio in the early hours of the company public life in1992 & 1993 shows high degree of confidence by its investors but with the passage of time it diminish till 1995 and today its constant around 60 due to financing.

Starbucks historical growth analysis

A reliable coffee shop atmosphere linked with the developed sound management; these were the things on which Starbucks past growth based.

For this purpose they crafted the strategy to drench quickly key geographic areas, particularly in an industry with low entry barriers. Its competitive advantage was greater people recruitment, training and management. Continuous development has been measured at all levels of Starbucks stores organization and design, coffees and teas.

Organized marketing structure is another key success factor to deal its expansion (real estate group, store development group, retail operation group).

Four A’s Strategy

Starbucks success enormously depends upon its Four A’s Strategy:

1. Acceptability
2. Affordability
3. Availability
4. Awareness

The Company site published the following Charts:

Starbucks at present (2005-2009)

Financial highlights of Starbucks as per annual report 2009:

Michael Porter’s 5 Forces Model

To understand the current specialty coffee industry I apply Porter’s five forces model to its instant environment of Starbucks.

 

Rivalry Among Competing Firm

High

Other coffee chains. Examples include Coffee Bean & Tea Leaf, Gloria Jeans Coffee, Peet’s, and San Francisco Coffee House

Due to great competition in coffee industry, local competitors are offering specials packages and opening of new restaurants to attract potential customers.

Low

Potential of new competitors

High

Due to low start up cost entry of potential rival is a great risk. To increase the value in Specialty coffee McDonald is trying to add specialty coffee in their current services. Potential revenue will be $125,000 per year by every store if they are effectively enter in specialty coffee market

No special knowledge is required

Low Capital requirement

Low

Potential development of

Substitute products

High

Potential alternate of coffee are soda, fruit juice, smoothes, beer and Water.

As we be known with water is healthy for human beings and most of all this it’s free and option cost to buy bottled water in also cheap as compared to coffee. So Water is the final choice of health conscious customer.

Other “quick grab” foods apart from pastries, muffins, doughnuts, etc sold at Starbucks are also substitutes. E.g. burgers, burritos, tacos, sushi & snack food.

Low

Bargaining power of suppliers

High

As Starbucks is a enormous giant of coffee market, suppliers are forced to adjust their prices according to it so bargaining power of coffee beans supplier is low.

As there are not a lot suppliers of technological innovated coffee beans machines such as automated coffee machines, latte and Espresso machines, etc, bargaining power of suppliers is high.

But in case of glass, napkin, lids, cups suppliers bargaining power is low because of wide competition in this industry and Starbucks have different contracts with them.

Low

Bargaining power of consumers

High

Bargaining power of Customers is very low when they came to best coffee such as Starbucks. So bargaining power of any single group of buyer has been reduces due to complete scale of Starbuck.

While new entrant have improved the bargaining power of buyers by offering sensible quality at cheaper price.

.

Low

Pest Analysis

Political/Legal:

Due to increase in clash between United States and rest of the world like southeast Asia and Middle East, Companies has to face severe scenarios e.g. refuse of American products like Starbuck, burger King, coca cola etc.

Change in import laws is a big risk for Starbucks as they are the only importer of coffee beans. If import process becomes difficult it will finally change the price of Starbucks and level of use will be affected.

Two class action suits of Starbucks are awaiting since 2001, Carr vs. Starbucks and Sheilds vs. Starbucks. In start Co refuted all the liabilities in these cases but to avoid any further participation in any delayed proceeding it agreed to settle the plaintiff’s claims.

Economic:

Consumer become more aware concerning their flexible spending due to increase in Unemployment and individual debt after economic recession of 2008.

In addition due to financial crises worldwide, further recession is projected which may affect company’s result approximately.

Starbucks also faced criticism from NGOs that persist the company to acquire specialized coffee beans, ensuring that those coffee beans were grown and marketed under certain economic and social conditions.

Social/cultural:

Environmental Mission Statement

Starbucks is very loyal for playing a role of environmental leadership in all facets

of its business. These are the principles that shows the company’s fulfillment toward environmental issues.

More concerned about environmental issues

Motivated toward environmental friendly product’s buying and selling

Developing innovation to bring change

Information sharing attitude toward associates

taking into account environmental responsibility as corporate worth

Encouragement of associates to share in company’s mission.

monitor the progress of each project of company

regular people do not only go to coffee shops to drink a coffee but to make themselves calm down so they are ready to spent more and more money on coffee (UK: Tea: £623m, Coffee: £738m)

Now a day’s coffee companies are more concerned about their ways of producing coffee beans, designing their supply chain and the ways of organizing and selling their products due to raise in environmental consciousness.

Technological:

http://reviews.carreview.com/files/2007/11/starbucks_sirena_bmw_med.jpg

For providing incessantly better customer services Starbucks launched cards to make customer’s visit more suitable and faster.

Mostly Starbucks location has WI-FI for consumer needs.

Technical Coffee machines are now available at Better and cheaper rates for home usage (Senseo).

SWOT Analysis

A SWOT analysis provides us an imminent on what the company is good at, and in what areas Starbucks could use assistance. Strengths, Weaknesses, Opportunities, and Threats (SWOT) are described below:

Strengths:

Global coffee brand built upon a reputation for well products and services

Value workers

Economies of scale in purchasing

Big Chain of stores: 17,000 stores in 49 countries.

Strong ethical values, friendly environment, and community activists.

Low turnover

Very Good relationship with its suppliers

Weaknesses:

High prices

More dependent on coffee and coffee related products.

Too much focus on expansion

Need of Strong competitive Position for more Expansion to reduce the Business risk

Continuous improvement may weaken over time and finally product acceptance will come toward slow growth.

Opportunity

Investment cost for New market is very low

International Expansion to the company has the chance to expand its operation

Diversification in product range toward other food and drinks.

Potential in franchising with manufacturers of other goods and services

Distribution agreement like hotels & airlines

Threats

Saturation in coffee market

Economic recession and Financial Crises

Competition with new entrants and copycat brands.

Rise in cost of coffee and dairy products.

Rise in Cost of beans in near future

Possessiveness of consumer regarding healthful fare

SWOT Analysis

Internal Factor

Strengths

S1 Brand Equity is high

S2 Employees are more satisfied

S4 Economies of scale in

Purchasing.

Weaknesses

W1 prices are high

W2 More dependent on coffee and coffee related products

W3 Deficiency of internal focus (too much focus on expansion)

External Factor

Opportunities

O1 Investment cost of New market is low

O2 Scope of Coffee Market

Is rising Worldwide

O3 Diversification of Product range toward food

and non food items

SO Strategies

1-Vertical growth to other low cost regions using superior brand.

2- To diversify in other related businesses hire the qualified employees

WO Strategies

1- To overcome the too much dependency on coffee and coffee related products increase the product range through Diversification in related businesses.

2- Get benefit from growing markets through reducing costs to reduce prices in low investment markets.

Threats

T2 Economic recession and Financial Crises.

T3 Domestic competition is increasing

T4 coffee and

dairy products are volatile

ST strategies

1- Avoid domestic competition by using high brand through differentiation.

2- To avoid volatile coffee and dairy use the economies of scale through backward vertical addition.

WT Strategies

1- To face the current financial crises and economic resources cost should be reduced to reduce the prices.

2- To avoid competition in domestic market depend on international alliance in the international stores as it is the main source of revenue.

Future Strategies of Starbucks

According to Starbucks’ current state of dealings, extensive competition, economic scenarios (at least in America) a question comes in mind about how Starbucks can turns itself around to show it profitable and most preferable choice for its customers?

Following are some key success factors and strategies which should be considered while making Company policies so that Starbucks can attain its original successful position.

What should Starbucks do?

Starbucks didn’t face any competitors which would have given it a sharp competition for a longer time. But after the entry of competitors in to the market Starbucks is no longer a sole player now. This is a huge threat for Starbucks because other companies are also providing premium coffees which can be compared to Starbucks level. Despite of the fact of competitors came into the market Starbucks is offering luxury coffee but at the high price as compare to competitors. If we compare Starbucks coffee with McDonald’s or Dunkin Donuts than it would not be something to think about because they are also providing good taste and quality. Below are some potential strategies that Starbucks should adopt to overcome its threats and weaknesses.

Advertising and promotion:

It is the general perception in the mind of people that the McDonald’s coffee is compare able and most probably better than the Starbucks so before renewing the name of brand Starbucks should equip people’s mind with the fact that Starbucks coffee is superior to all other coffee and beverages brands. For this Starbucks need to be more aggressive in there promotion strategy. In 2006 Starbucks allocated only $38Million for its marketing and promotion strategy as compared to its closest competitor McDonald’s $782 Million and Dunkin Donuts $116Million. So by this figure it is clear that Starbucks should make a huge effort for its promotion and advertising strategy and should allocate more funds where needed, to reach at peak level and to keep the leadership.http://farm4.static.flickr.com/3039/2926840497_2a8dc5f460.jpg

Product Differentiation Strategy:

Starbucks should also work on product differentiation strategy. McDonald’s is offering premium coffee at lower price although but it would not suit to the Starbucks to start the price war. If Starbucks start a price war than it will minimize the brand goodwill and it would also not be profitable for both the organizations. Starbucks should also research something new which adds more taste and quality to coffee which maximize the customers and capture more market. If Starbucks make something new than it should distribute free sample for a limited time so the people come to know and if the response is good than they should make it available to all its stores.

Quality control strategy:

Starbucks need to introduce more coffee variety with a maximised quality. Starbucks offering one type of coffee to consumers while its competitors like Peet’s is offering multiple types. Starbucks needs to ensure that the coffee which is offered to customer having a high quality if it is not than the customer is not going to pay such a premium price for its coffee.

Cost Efficient Strategies:

Starbucks should also work on reducing its price with a high quality to attract more customers which will add more to its profit and growth.

Store Expansion decisions:

Starbucks should think now to put a halt on its strategy of opening new branches. In 2007 only Starbucks opened 1650 new stores which came to the total of more than 15000 stores and thought to reach at 40000 in future. It would also be better for Starbucks to stop opening new branches in US now and start thinking to open branches in small regions.

Becoming more environmentally friendly:

Although Starbucks is renowned for its environment friendly image and they are continuously trying to boost their efforts in this regard, still there is room to develop so they can further discriminate themselves. Starbucks should save their capital by use of porcelain cup rather than disposable cups, if customer wants to take their coffee in the cafe. Renewal of this practice will show them more environments friendly. Starbucks should offer in-house drinkers who prefer porcelain cups at discount to push this strategy.

Selling of mugs at reasonable prices, implementation of recycling bins process of food waste,

Use the financial inducement & encourage the customers to revive the plastic cups rather than to purchase a new one are some ways to enhance its image as more environment friendly. These all things would help the Starbucks to differentiate it from its competitors and improve its image of corporate responsibility.

Finally this should be the continual process of company to analyze themselves, encouragement of employee’s suggestions regarding environmentally beneficial initiatives and should make the continuous improvement in this part so that their green logo seems appropriate for the company.

Starbucks Drive‐Through

Expansion is the main focus of Starbucks but it has been noticed from various reports, surveys and people opinions that during peak hours of the day specifically in mid morning, there become the lack of tables and seats due to which customers move toward some other place in result Starbucks loses its potential customers. In addition, although Starbucks store are placed at every street corner but people face difficulty in parking especially in peak hours.

As they are giving attention toward increasing of store space to hold the crowd in peak hours but not marketed it aggressively, though it would not be cost effective as expanding market campaign requires big investment but to keep customers preference it’s necessary.

Focus on their Neglecting Customer

Starbucks is distinguished for its coffee specialty and avoiding a big target market of tea, it should also think about researching into the tea specialty drinks market. As Tea has some perceived value of healthy benefits it will increase brand attractiveness. For this purpose they should continually revived their company policies to enhance their customer relations.

Reward Programs

Currently Starbucks is offering rewards in form of “Starbucks Card programs” where customer can refill its credit online and use it as Cash card at any Starbucks outlet. It doesn’t differentiate it from its competitors as now they are providing the same reward programs for its customer. To take an edge over its competitor Starbucks should give some distinct reward programs like corporate with the large retail companies and airlines and merge their reward programs at Starbucks to make its first and foremost choice of its targeted customers as it will provide them an opportunity of wealth maximization .

Conclusion

Although there are some deficiencies in company policies but it doesn’t show that Co is diminished much at all, it can get back on its previous original successful track by capitalizing its strengths. The existing economic situations which are contributing to its slouch market share should be keenly observed and noticed so that in future Co can stimulate it and make it brand strong and preferable choice for its customers.