Strategic planning of starbucks

Strategic Planning of Starbucks(Past Decisions, Current situation and Future Options)

Student ID number: F1005899

Full name: Namrataben Govindbhai Panchasara

Intake and group number: 8

Module Name: Strategic Planning

Assignment Type: Individual Assignment

Date: 04/11/2011

1Namrataben Panchasara (Student ID:F1005899)

Executive Summery

This report aims to strategically based evaluate Starbucks past and current

situation and future position of this largely successful company. The analysis uses Michael five forces analysis, Starbucks’ Original Generic Strategy, Company success factor, SWOT, PEST and recommendation for future that Starbucks can organised Reward program Organised, Becoming more Environment Friendly, CD Burning, Install free wireless internet and Rent out meeting space, Increase connection with customers, Continually improve the coffee. At last conclusion and i use book of Michal Porter and some others and electronic articles and websites.


Index

No. Index Page No.

1. Executive Summery 2

2. Introduction of the company 4

3. Porters five force analysis (Past) 5

4. Starbucks’ Original Generic Strategy (Past) 8

5. Starbucks’ Success Factors 9

6. Michael Porter’s 5 Force analyses (current) 11

7. SWOT Analysis 12

8. PEST Analysis 13

9. Recommendation for Future Action 14

10. Conclusion 16

11. References 17


Introduction of company

Starbucks is the largest coffeehouse company in the world. [1]Starbucks Corporation was founded by English teacher Jerry Baldwin, history teacher Zev Siegl, and writer Gordon Bowker in March 1971. Starbucks Corporation is the most successful coffee shop chain in the past few decades. Using their aggressive growth most of its competition.

The current countries in which Starbucks are located world-wide more than 17018 (as of July 3, 2011) retail stores in 50 countries[2] The first Starbucks first coffee shop opened in Washington, America in 1971 and The first Starbucks location outside North America opened in Tokyo, Japan in 1996. Starbucks entered the U.K. market in 1998 with the $83 million (more than 60 stores). [3] Starbucks customers enjoy quality service, an inviting atmosphere and an exceptional cup of coffee.

Starbucks selling Coffee (drip brewed coffee), Coffee beans, other hot and cold drinks, cold and hot Sandwiches, Panini, Snacks, Pastries and item like Mug. Customers are able to study read and enjoy music while the drinking coffee. Starbucks strategically position of each stores with hopes of matching the specific location, helping to create a unique atmosphere.


http://en.wikipedia.org/wiki/Tokyo,_Japan

http://en.wikipedia.org/wiki/Gordon_Bowker

http://en.wikipedia.org/wiki/Gordon_Bowker

http://en.wikipedia.org/wiki/Zev_Siegl

http://en.wikipedia.org/wiki/Jerry_Baldwin

Michael Porter’s 5 Force analyses (past)

My analysis being with a through breakdown of the competitive environment which Starbucks corporation in last fifteen years. When Starbucks was first acquired by Haward Schultz. Michal Porter author of competitive strategy to analyze in industrial environment and develop an optimum strategy for success. The five variables responsible for the five forces analyze using the model are buyers, industry suppliers, potential new entrants, competitive among existing firms and substitute products. I will concentrate on the competitive environment in which Starbucks created and I will also considerate social and microenvironment force.

Industry rivalry Potential for new entrance Substitute products Supplier bargaining power Bargaining power of buyers

Industry Rivalry

Define an industry can described as drawing a line between the substitute products which offered by competitors and the established competitors.[4] (Porter,1998 page no.17) The assumption is that the relevant industry is confine to the competitors within the speciality of coffee segments. Those get any reference to competitors from outside of the


speciality of coffee segments. By definition should be considered competitors from substitute products. However, given the difficulty in defending the boundary of the speciality coffee industries. The general competitors created by rivalry between established competitors I analyze drives down the rate of return on invested capital toward what economist refer to as “the industry floor rate of return” which occurs when the market is really competitive[5] (Grant, 2008 page no.69).

Some of the largest basic coffee companies who sales coffee in grocery chains could have responded to swift growth in the speciality coffee industry by introducing by they own versions of popular supermarket brands [6] (Koehn 2005). Some established companies would have needed to achieve high volume of sales then small companies to achieve profit target.

Potential for new entrants

The second force in Porter’s model which will be applied to the analysis of the industry environment. The potential for new entrants which was Starbucks incubated. The primary prevention to new entrants into industry is the barriers to enter. The higher barriers to entry are within any given industry the threats of new entrants to that industry [7] (Porter, 1998 page no.7). The especially coffee industry does not pot a high premium on economies of level. We can tell in other words companies with national distribution in the coffee industry at large experienced some discount thought bulk purchases and suppliers and greater infrastructure their advantages was small. This only would involve low barriers to entry in the speciality in the coffee industry.

Starbucks entered in coffee industry in 1971 but Starbucks’ stores launched grew more successful in 1996, new stores generated an average of $700000 revenue in their first year that more than average of $427000in 1990. In this way partly due to growing reputation of Starbucks brands. Starbucks was entered in Japan’s market in 1996. Before 1996 Starbucks has business in United States only. In 1998 Starbucks entered in United Kingdom market. That is new entry in UK coffee industry. In 2002 Starbucks opened first store in Latin America (in Mexico City). In August 2003 opened new store and first store in South America (in Lima). In end of 2010, Starbucks opened in EI Salvador (Center America)[5] In the early days, Starbucks so busy with selling coffee, one cup at a time, opening store and educating people about dark-roasted coffee that they never thought much about branding strategy.

In 1996 Starbucks began selling bottled Frappuccino. In 1999 Starbucks acquired Tazo Tea. In 2000 Acquired hear music, a San Francisco based company. In 2003 Starbucks acquired Seattle’s Best coffee. In 2005 introduce Starbucks coffee liqueur; acquires Ethos Wate.

Substitute Products

Another force which up to an organization and its include in Porter’s five force and it is also threat of substitute products. The Pepsi and Coca-cola is the primary substitute products posing a potential threat to specially were the caffeinated soft drink. Competitors like Coca cola and Pepsi offered drink, which had the caffeine inherent in especially of coffee, at significantly lower prices [8] (Quelch 2006). However, this is the large different in the test and demographic makeup of customers between the two products. That is only true direct substitute for especially coffee available was basic coffee. Basic coffee was considered to be of significantly lower quality then speciality coffee. As an analysis, it actually presented the industry with little threat of substitution.

Bargaining Power of Buyers


The bargaining power of buyer also plays an important role determining the standpoint from an investor’s point of view of the environmental which the speciality of coffee industry existed in inception. The force of the buyer’s bargaining power is relative to the ability of buyers to force down prices, bargain for higher-quality products or more services, and pit rival organizations against one another.[9] (Porter, 1998, p. 24) In the specialty coffee industry, individual consumers constituted the majority little bit of all buyers; so, they didn’t typically buy in large volumes and did not act in concert. Both of these factors reduced the relative bargaining power of buyers in this industry. In addition, the cost of buying a cup of specialty coffee did not represent a significant small part of any individual buyer’s cost of living, reducing the propensity for price shopping and increasing the importance on quality and customer service. One of the primary differences between the basic coffee industry and the specialty coffee industry is the amount of differentiation involved in the specialty coffee industry and the lack of differentiation in the basic coffee industry. At last, the buyer or consumer in the 14 specialty coffee industry does not have full information. The consumer does not know the actual demand, market prices or supplier costs which seriously reduces their bargaining power. Overall, then, the bargaining power of the buyers or customers of the specialty coffee industry, which consisted basically of individual consumers, was not considerable.

Bargaining power of buyers

The bargaining power of suppliers to the specialty coffee industry would be exerted by also threatening to move up the price of the Arabica beans which are used in the production of dark roasted coffee, or by a threat of drop in the quality or quantity of the coffee beans themselves. The suppliers of Arabica beans were mostly small to medium-sized family owned farms and typically sold their crops to processors through local markets. (Lee, 2007)[10] Primarily, these farms were located in Latin America, the Pacific Rim and East Africa. (Lee, 2007) These farms were numerous and unrelated to one another, with no unionization, giving them very little collective bargaining power.

While there was no direct alternative for the Arabica beans used in the production of specialty coffee, the huge range of farms which supplied the crop made it easy for buyers to avoid obligations to any particular farmer, which all over again eroded the bargaining power of suppliers. The farmers who produced the Arabica beans sold exclusively to specialty coffee retailers and as such were dependent upon their continued business. In spite of all of the stated reasons which suggest the specialty coffee industry is one where the bargaining power of suppliers is severely hindered, the most important 15 Ingredient within specialty coffee is quality Arabica beans. This allows for differentiation to arise between the many suppliers farms based upon the quality of beans they produce. This, in turn, should considerably raise their bargaining power as suppliers.


Starbucks’ Original Generic Strategy

Michael porter defines three potentially successful generic strategy; overall cost leadership, differentiation and focus.Overall cost leadership 20 implies the pursuit of cost reductions in all areas of a firm through strongly controlling overhead, avoiding marginal, not as much of profitable consumers and sacrificing explore and development, customer service, advertising and other areas not relevant to the direct manufacturing of a product. The generic strategy of differentiation involves the creation of something that is supposed by the industry as being unique. This can take on many different forms including but not limited to brand image, technology, features, dealer networks and customer service [11]. The last generic strategy mentioned is focus, which targets an exacting group, geographic market, or segment of a given product line. (Michael Porter, 1998, p. 38)[12] The Starbucks seen today would seem to fit the generic strategy of differentiation; though, the original strategy used by Starbucks was closer to the generic strategy of focus with an importance on differentiation within the particular target consumer segment. At the requirements for a generic strategy of differentiation, as defined by Michael Porter, sheds light on why this could not have been Starbucks’ original generic strategy. A firm that focuses on the generic strategy of differentiation would reveal strong marketing abilities; so far, Starbucks did not even run a television advertisement until 1998. In fact, their advertising budget only constituted 4% of their total incurred costs.[9] (U.S. Securities and Exchange Commission, 1998)[13] A second characteristic universal in a company pursuing the generic strategy of differentiation is a strong and established capability in basic research and development, with individual as different to quantitative measurement goals. The primary means by which Starbucks conducted its research and development in past was through trial and error within company stores. A third characteristic of companies pursuing a generic strategy of differentiation is an extensive belief in the industry of having unique skills or unique products. Starbucks had this reputation within the distribution


segment of the specialty coffee industry. Their original store was founded in 1971 and they were known for their luxury standards and knowledgeable staff.

With this information in give, an understanding of why Starbucks has continued such high profit margins while at the same time increasing market share exponentially can be ascertained.

Starbucks’ Success Factors

First-mover advantage Maintaining quality of Arabica beans Employee Satisfaction

First factor was their ability to design a strategic approach to growth that quickly established the possibility of their business model and took advantage of some key demographic groups.

The second factor was their ability to attract the highest-quality employees through the execution of advanced healthcare plan while reducing costs and giving equity rights to all employees. The strategic alliance they had with preservation international allowed them to create a sustainable supply chain of high quality coffee.

The three previous factors helped enable them to advance The fourth factor in their success, a centre of population environment in which

casual community interactions could take place. The fifth factor to their success was their ability to adjust to the changing dynamics

of their consumer demographics. All of these factors have allowed them to stay at the forefront of the specialty coffee industry.

Success...


Dhaval Govani, 03/11/11,

The strength of the company, together with promising market forecast has lead Starbucks to one of the most victorious IPO (Initial Public Offering) in 1992. By going public, Starbucks would get funding to fuel its expansion strategy over the years to come. From $5.50 in 1992, Starbucks common stock price went up to $25 in 2001, and is today at $58.

In order to maintain the balanced equity among shareholders, Starbucks stock was split four times (1993, 1996, 1999 and 2001). As the share value greater than before, these split also prevented high prices from deterring small investors .Starbucks stock growth (in blue on the chart) has always been above the average beverage industry stock growth.


Michael Porter’s 5 Force analyses (current)

Industry rivalry

The industry rivalry within the specialty coffee industry has changed dramatically since 1990. Nothing like the early days of the specialty coffee industry when Starbucks competed mainly against other small-scale specialty coffee retailers they now compete against companies of changing sizes and different exposures to specialty coffee. Starbucks competes by a variety of smaller scale specialty coffee shops, mostly well-built in different regions of the country. All of these specialty coffee chains are differentiated from Starbucks in one way or any more.

10 years ago Starbucks and McDonald's were at complete opposed ends of the range in the restaurant industry. yet, McDonald's, encouraged by the success of its upgraded drip coffee, began testing many drinks sold under the name McCafe. Starbucks meanwhile, with its rapid development, was adding drive-through windows and many breakfast sandwiches, similar to the Egg McMuffin's served at McDonald's. These measures have drawn the two companies closer together as competitors due to an advance into the demographic consumer base made by each company. [14]

The McCafe, first conceptualized in Australia in 1993, was bringing to the United States in 2001. The concept took an area of the typical McDonald's restaurant and added leather couches and an attractive counter on which cappuccinos and sweets were sold. The McCafes did not take hold originally, not making it past their first trial stage, mainly due to the unfortunate conditions of the stores in which they were placed. Now, seven years later,


McDonald's has invested $700 million in its "plan to win" strategy, initiated during 2003, which has led to modify of thousands of US locations.

Substitute Products

The force of substitute products in the specialty coffee industry has decreased. Many companies that presented the specialty coffee industry with a threat in the form of substitute products have actually entered the industry and now struggle directly by offering their own quality coffee selections. The primary substitute products still affectation a threat to the specialty coffee industry are the caffeinated soft drinks offered by Pepsi and Coca-Cola. Still, even these substitute products front little threat to the quality coffee industry. In the past five years, studies done on the percentage of meals or snacks that included a fizzy soft drink as different to coffee have shown a problem in consumer favourite. Coffee has regularly gained preference over carbonated soft drinks.

SWOT Analysis

Strength

Motivated staff

The cafe industry is to some level dependent on front house staff, their manner and their skill to make customers come back. Starbucks promotes a situation that encourages team working and collaboration. As such it encourages managers to follow its motto of their personality, train the skill·. Hence through outstanding service, customers keep coming back. possibly, Starbucks has one of the lowest staff revenue rate in the industry (workforce.com).The strengths offer a favourable impact.

Weaknesses

Over-reliance on home market:

Although the American coffee market is value over $18 Billion (e-importz.com)., over-reliance on this market leaves Starbucks vulnerable to unexpected changes that may occur in such market. E.g. recession affects disposable income for customers and then, income. Thus the management decision to focus mainly on the US market it a weakness

Opportunity

Growth coffee market

The universal taste of coffee drinkers in America is shifting near the more expensive organic coffee which accounted for $1.3 billion in imports (Restaurant hospitality). This links to the Social factors recognized in the External analysis and relates to changing tastes this is favourable because it provides an opportunity for Starbucks to increase its customer support with the possibility of high profit margins as a result.


Threats

Competition

Coffee industry is very competitive. McDonalds is the main competitor of Starbucks coffee. McDonalds which was recently found to sell good coffee for better value is damaging for Starbucks (digitaljournal.com). In other words this is a u critical influence. (Look at page no.11 Industry rivalry)

PEST Analysis

Political

Government stabilityPolitical stability of countries is a main issue that firms need to consider becaus either indicator may aim to a country as being investor friendly, however that could rapidly change when there is elections or political instability (e.g. Egypt). This could lead to huge trouble in a firms operations and strategy or in a worst case situation where Starbucks was forced to totally pull out of Israel because of such issues therefore harmfully affecting its strategy for expansion. Political control is unfavourable in this case and presents a risk to Starbucks

Economical

Exchange RatesThe falling dollar rates compared to other currencies (Bloomberg.com) which was caused in part by weaker economic policy will affect imports. Most of Starbucks· vital supplies such as coffee beans, sugar and milk will be affected because they are imported, so incurring higher cost due to weak dollar. This raises a question as to whether the company will pass the extra cost to consumer and risk creation its coffee even more costly.

Technical

Technological InfluenceTechnological advancements have never been so fast, hence firms need to consistently follow the trends and exploit any opportunities that may result and implement any change required. For example, Starbucks have embraced the new phone payments system that was introduced recently which helps cut long queues at peak time

Recommendation for Future Action

Reward program Organised Increase International Expansion Becoming more Environment Friendly CD Burning Install free wireless internet and Rent out meeting space Increase connection with customers Continually improve the coffee

Rewards Program


Recently, Howard Shultz has referred to a strategy he calls “segmentation,” as being one of the initiatives he will use to reach new consumer segments. A recommendation not to pursue this strategy is supported by the analysis done in this paper. As previously stated, a couple of Starbucks’ primary recent competitors are McDonalds and Dunkin' Donuts. Both of these companies have given many market signals which can be interpreted as their strong commitments to selling value specialty coffee. The strategy of “segmentation” would seem to be Starbucks’ counter to both McDonalds’ and Dunkin' Donuts’ intentions. However, if Starbucks pursues their “segmentation” strategy they risk degrading the most significant competitive advantage they possess: their brand image. By selling a discounted specialty coffee at Starbucks’ locations, the overall brand's image could be degraded and an un-winnable price war with McDonalds and Dunkin' Donuts becomes more likely. Instead of selling discounted coffee under their “segmentation” strategy, which seems aimed at appealing to the price sensitive lower end of the market which is likely destined for McDonalds and Dunkin’ Donuts, Starbucks should concentrate on creating more elaborate discounting techniques to employ with their most frequent customers. This both eliminates the potential degradation of the Starbucks’ brand and increases the bond customers will experience with Starbucks. Additionally, a rewards program will encourage customers to visit Starbucks more often and will dissuade them from visiting competitor stores, such as McDonald's and Dunkin' Donuts, which seem unlikely to offer reward programs.

Increase International Expansion

The first and most great action which Starbucks should take is to decrease their US expansion efforts. Continued aggressive attempts at growing in the United States by adding as many new store locations as in the past will inevitably act to cannibalize existing locations same store sales. The primary reason why this is true and why Starbucks should reduce their U.S. expansion plan is the conclusion reached earlier in this analysis: one of the qualities natural to the mature stage of the industry lifecycle is excess numbers. By dropping their expansion efforts in the United States, Starbucks can convey the capital saved into their international expansion efforts. The international market provides an ideal target for increase for three important reasons. First is the lack of penetration of specialty coffee in many nations and the potential market share which one these nations represent. For example, Starbucks currently operates around 16,000 stores with 10,000 in the United States and 6000 internationally. so far, the United States has not ranked in the top 10 for total coffee expenditure per person in the last 25 years. This suggests that internationally, there is an vast coffee drinking population to be tapped into. For example, originally, Starbucks introduced their Tazo tea brand into the Japanese market. After a successful examination run in Japan then Tazo was brought into the US market. More such modern products should be tested first in international markets 70 because there, Starbucks does not put its brand reputation at as great a risk. This is true since those markets have not been exposed to Starbucks for as general a period of time and, thus, the brand is more flexible in those markets.

CD Burning

In addition to free wireless Internet access, Starbucks could equip stores with a CD burning device to allow customers to burn copies of the online albums they purchase within Starbucks at a low charge. Not only would this increase the customer’s options when purchasing an online album but would also encourage customers to buy online albums within Starbucks’ locations. so, customers could not only get the electronic version of their selected music for their Ipods but could also have a hard copy CD for use in other devices such as the vehicles which transported them to the Starbucks store. Having this extra


motivation could well increase foot traffic in Starbucks’ locations. As well Starbucks could promote their brand and music label on the blank CDs. The labels of the CDs could use or include Starbucks logo and the interactive experience the customer will have watching their CD being burned and the label being placed onto it will give them a better sense of ownership.

Install Free Wireless Internet and Rent out Meeting Space

Next, Starbucks should create a more business and technology friendly atmosphere in its stores. With the advent of the Internet and the ever increasing array of electronic products capable of accessing it, there has been an increasing shift in consumer's work locations from office buildings to home offices. With this shift and natural human psychological needs, Starbucks is allotted an opportunity to cater to these consumers working out of the home by providing meeting space for rent. These meeting spaces should be accompanied with the addition of free wireless Internet access throughout every Starbucks store and printers accessible to the customers, which are color capable and reasonably priced. The meeting space should be offered at a per hour rate while the printers should charge per copy. The availability of meeting space and printers, coupled with free wireless Internet access would encourage those consumers working from their homes to engage in business activities at local Starbucks. Some of Starbucks’ competitors, such as Caribou coffee, have already taken advantage of this trend in consumer preference but do not currently have the market share to use it as a defendable competitive advantage.

Increase Connection with Customer

One way in which Starbucks has for all time differentiated itself from its competition has been through the emotional relationship formed with its customers. This connection is formed in important part by creating a store impression that fits the local settings and by training baristas to increase the personal relation between themselves and their customers. Specifically, Starbucks encourages feedback from their customers to induce a family like feeling and instructs all baristas to welcome every customer with the question “how are you doing today?” To extra increase this expressive connection with their customers, Starbucks could implement digital photo frames in all store locations and upload local customer photos and probably even customer supplied family photos, which are appropriate in nature, upon request. This would be a new, classier version of that time worn image, the local pub with innumerable photos of the regulars festooning the walls. At present, the majority of Starbucks stores have latte machines that are placed in such a way as to block the baristas from presentation the customers and vice versa when the barista is in the act of creation the latte. These latte machines pose a serious physical blockage to the barista’s ability to establish a lasting impression on the customer.

Continually Improve the Coffee

Given the specialty coffee market’s transition into the mature stage of the industry lifecycle, it is important to maintain a reputation for the highest quality coffee in the industry. In February of 2008 the magazine Consumer Reports rated McDonald's drip coffee as tasting better than that of Starbucks. To ensure the quality of their coffee, Starbucks should continually analyze their brewing systems and practices and consider renovations. The brewing process should at all times be judged based upon its ability to bring out the complexities and distinctive flavours of the world’s different exotic specialty coffees.


Starbucks should also be intent upon protecting whatever brewing process they deem to be the best through patents or acquisition of patents, which would, in turn, provide a defendable competitive advantage.

Conclusion

Starbucks strategy is fairly simple increase the perception of high quality of a product, become accustomed stores to the consumers’ lifestyle, and blanket areas totally, one after the other, even if the stores cannibalize one another business. Starbucks is very successful coffee chain.The company’s move on cuts down on delivery and organization costs, shortens customer lines at individual stores, and increases base traffic for all the stores in an area.

Reference

[1] http://www.hoovers.com/company/Starbucks_Corporation/rhkchi-1.html

[2] http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-infoReq

[3] McDonalds Corp Betting That Coffee Is Britains Cup of Tea". New York Times. 28th March 1999. Retrieved

August 6, 2009

[4] Porter, M. E. (1998). Competitive Strategy page no.17) Techniques for Analyzing Industries and

Competitors. New York: The Free Press.

[5] Robert M. Grant : Strategy Analysis august 2008 (Page no.69),London

http://news.starbucks.com/news/starbucks+celebrates+first+store+opening+in+el+salvador.htm

News.starbucks.com. Retrieved July 7, 2011.

[6]Phillip Kohen 2005


Competitors.

[8]John Quelch Globle market Strategy include in 21st century (2006)


Competitors.

[10]Lee broen,John Joseph Garners Books 2007.

[11] http://www.slideshare.net/TL327/starbucksa-strategic-analysis-rlarson-honors-2008-2607618


http://www.slideshare.net/TL327/starbucksa-strategic-analysis-rlarson-honors-2008-2607618

http://www.nytimes.com/1999/03/28/world/mcdonald-s-corp-betting-that-coffee-is-britain-s-cup-of-tea.html

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-infoReq

[12] Porter, M. E. (1998). Competitive Strategy: Page no.38 Techniques for Analyzing Industries and

Competitors. New York: The Free Press.

[13] U.S. Securities and Exchange Commission, 1998

[14] Review, Is Starbucks a Broken Brand? , 2008


Education

Strategic planning of starbucks