Assignment Help on Starbucks
Executive summary/Problem Statement
Starbucks became a victim of its own aggressive strategy owing to huge upfront investments, which directly impacted its bottom line in terms of declining shareholder value especially in periods of recession and competition from substitute products.
Strategic Issue(s) impacting the organization
The strategic issues impacting the organization will be done in light of Michael Porter’s Competitive Strategy model; below find the analysis for each of these forces.
- Industry Rivalry:
The competition faced by Starbucks was both in forms of product base and the retail base. Since Starbucks’ differentiation strategy has marked itself as amongst the speciality coffee segment; there was growing trend and awareness hence industry rival was moderate.
- Bargaining power of buyers:
This factor was relatively lower, since it was a differentiated brand and customers could associate themselves with Starbucks.
- Threat of substitute products:
Although trend was shifting from home brewed coffee to readily brewed coffee; but a fierce competition in times of recession was arising from ordinary coffee marketers such as Mc Donalds and Dunkin’ Donuts; hence threat was increasing.
- Barriers to entry:
The industry seemed to have relatively low barriers to entry because it was not characterized by any advantages that could be achieved by economies of scale.
- Bargaining power of suppliers:
The main ingredient i.e. the Arabica Beans were sourced from medium sized farms that were family owned and were located mainly in the Latin American and African region towards East; although there was no direct power but for Starbucks dependency on them was too high.
It is obvious from the Starbucks’ position that company had the following strengths:
- Strong brand identity – the brand had evolved over time, in earlier times even without much marketing efforts it carried a positive image and was reflection of quality.
- Quality – its focus on quality was reflective in nitty gritty details from sourcing of coffee beans, design and ambiance of its outlets, training of baristas and quality service to the customers where employees could engage with the customers for their ease and comfort.
- Accessibility – To manage strong foothold and give customers the convenience of having access to Starbucks, any time and everywhere it focuses on its strategy “Starbucks buzz” and had stores everywhere even in clusters. With time it also expanded the approach through drive-thru windows, and in store locations (Sweet, 2007).
- Variety – To keep up with changing trend and growing competition Starbucks had to introduce variety of products / flavours and variants (such as Frappuccino) to cater to all tastes. It also introduced retail products like VIA; moreover new ways of engaging customers by providing them a nice coffee experience with entertainment like reading, music was introduced and offered.
Some of the avenues that trickled into lost profits for Starbucks are as follows:
- Over clustering of outlets (locations) – in era of recession, Starbucks could not keep up with increasing costs of its outlets, this overexposure led to quality compromises on which it was founded on.
- Too much product innovation – that cannibalized the existing products and also sometimes became a risky venture such as Seattle’s Best
- International markets – Starbucks did continuous efforts to diversify its geographic reach, and it did very well in terms of customizing its products by catering to local tastes; such as in Canada it introduced Frappuccino.
- Changing trends and consumer demands – for customer ease and their demand for convenience and readily available products, VIA (the instant coffee) was made available through convenience and general, grocery stores.
- Expanding through partnerships – as opposed to initial and conservative growth model of organic growth, it moved towards establishing partnerships, which helped it add new and alternate distribution channels and increased its retail footprint.
- Growing competition – the speciality coffee industry was not only receiving direct competition from companies such as Peets and Coffee Beans, but even the cheaper alternatives such as Dunkin’ Donuts and McDonalds started to give a relatively tougher time as well.
- Recession – In periods of recession, the cheaper coffee alternate was preferred; more so because Starbucks was differentiated as a premium brand.
Value chain analysis
Possible Strategies towards Growth
According to Michael Porter’s model, there are three generic strategies that a company adopts to grow over time viz. overall cost leadership, differentiation and focus. The overall cost leadership focuses on controlling costs to achieve the targeted bottom line – it has less emphasis on research, customer service and advertising, the general idea is to target mass and volume customers that are relatively less profitable.
The differentiation strategy strives to maintain the image by developing a unique selling proposition – the way forward is branding creation and building, research and development, advertising and customer service at individual level. And lastly, the focus strategy is directed to cater to particular group, market (geographic or otherwise) or certain segment of a product line. (Porter, 1998).
Starbucks initiated itself as a focus differentiation strategy, but over time with growing needs evolving it would fit the differentiation strategy. To keep its growth consistent Starbucks should strive to typical differentiation strategy by focusing on the following:
- Strong marketing abilities – Initially Starbucks was weak on advertising, it did not even cast television commercials until the year 1998
- Focus on Research & Development – its research and development capabilities were very weak, instead of lobbying and researching for new opportunities and avenues other than by trial and error at company stores; hence an established research was required
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