Starbucks: Strategic Management Analysis
Task A
1.0 Macro Environment (PEST Analysis)
The macro environmental issues affecting the operations of Starbucks are (exhibit-1 of Appendix 1)
Political factors- Since Starbucks offers the best brewed coffee in the industry it has to acquire the best coffee beans from around the world and thus taxation policies in different countries highly influence the purchasing decision of the company as they have to pay higher prices for attaining best quality coffee beans. And more over since the 9/11 attacks in the United States there has been a slump in business growth in every sector and in every part of the world. More over major political decisions in countries producing coffee beans may highly affect the business of Starbucks as the company may have to take the burden of price rise which is eventually passed on to the customers (Andrew, 2009).
Economic factors- Since Starbucks has several international presences thus a low rate of economic growth in a country of its presence may result in an economic loss for Starbucks. More over strong competition from competitors may also bring down profit margins for the company. Exchange rate fluctuation may also hamper its trade across international boundaries.
Social factors- social factors include age, income, standard of living, working conditions, locations etc. Starbucks has international presence and thus the presence of these social factors in different countries highly affects the operations of Starbucks (Armstrong, 2005).
Technological factors- Starbucks has always welcomed new ideas and thus has always encouraged new technology. It has been looking for new techniques to improve its internal facilities in different locations. The presence of Starbucks in different countries gives it access to new techniques and technology to improve its infrastructure.
1.1 Industry Analysis (Porters 5 forces)
The five forces identified by Porter that helps in analyzing the industry in which a company is operating are as follows (refer to exhibit 2 in Appendix 1)
Bargaining power of suppliers- in Starbucks the bargaining power of suppliers is high because of its demand of high quality raw materials and thus it has to depend on the best suppliers (Arnhold, 2010).
Threat from new entrants- although the company has to face competition from other companies in the coffee chain market but the competitive advantage of the company and the introduction of new and innovative products and its focus on cost differentiation and focused differentiation has helped it to achieve a strong position in the market.
Threat from substitute- a number of substitutes although exists in the market Starbucks has a competitive advantage. Starbucks has always been able to win the hearts of people with its high quality food and services thus a new entry in the food and beverage industry would not pose much threat to the company.
Threat from competitors- Starbucks has potential threats from McDonalds, Peets, KFC, etc and thus it has been introducing new products and developing its infrastructure to cope up with the competition (Bell, 2009).
Bargaining power of customers- bargaining power of customers is somewhat high with the availability of similar products and services and thus a cost leadership would help in this scenario. And Starbucks being a leading name in the coffee chain business has always focused on cost leadership.
1.2 Positioning Map
The positioning map or the perceptual map defines the target segment and also presents the way that the company would present the product to the target audience. In case of Starbucks the company has positioned the products in the niche region. Initially the company focussed majorly on product differentiation and
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quality but however with time the company also adopted pricing differentiation strategies. The exhibit 3 in the Appendix 1 illustrates the positioning strategy of Starbucks as compared to its competitors (Bettman and Mita, 1987). The company also has a youth appeal and thus youth focus has also been one of the major positing strategies. The concept of ‘third place’ illustrates its positing strategy.
1.3 Segmentation
For ensuring an effective marketing and promotional strategy an organisation needs to segment the market effectively. The market segmentation is essential for analysing the exact consumer behaviour and thereby developing the product and pricing strategy. In case of Starbucks the market segment that the organisation targets have been the youth (age wise) belonging to the middle to upper income group (socio-economic demarcation). The Coffee chain has coined the word ‘third place’ for its coffee shops so that the youth can associate with the coffee shops. The ambience provided in these coffee shops allows them to unwind and relax. The company has been proactive in its market research and has an excellent mix of products mostly targeted at the youth segment (Bussing-Barks, 2009). The coffee chain has more than 100 products and the ‘Frapucciono’ and the ‘Lattes’ are the most preferred products. The youth focus has ensured that the company has been successful in the competition and has been capable of sustaining growth in the current competitive markets.
1.4 Product Life Cycle
The main product offered in Starbucks is freshly brewed Coffee. But since its introduction the company has brought about many changes in their product range to keep pace with the competition and to prevent its products from reaching the declining stage. Although the main product at Starbucks is coffee but with time the company has come up with different products and services to provide their customers with a good experience (Canales et al. 2000). Starbucks has always identified the needs and demands of its customers and come up with a range of products and services to live up to their expectations (refer to exhibit 4)
The product life cycle is the most important part of a company’s marketing strategy and thus companies need to identify the different stages of their product and thus introduce changes and innovation in their products when necessary to prevent their products from the declining stage. Starbucks founded almost two decades ago experienced a rapid growth since its introduction but in the last few years the products have reached a decline stage. The company has thus come up with innovations in its products and services at times as their marketing strategy to be in competition. Starbucks begun operations by introducing the Frapuccino line and targeted the non coffee drinkers mainly (Chase, 2009).
The Starbucks products, mainly coffee and other beverages when introduced in the market saw a stage of steady growth and reached a maturity stage with the introduction of several other services and products. But in the last few years due to growing competition and availability of similar and better products and services in the market there has been a decline in its product life cycle. Thus to deal with this decline the company has lined up new products and services and has also focused on international expansion to explore new markets. Besides selling coffee and associated products the company has also been focusing on repositioning itself in the non-coffee iced-beverage market.
1.5 Critical Success Factors
The success of Starbucks lies in several factors. Firstly the company has always had a customer focus and this has resulted in innovation of products and services. Innovation has meant that the organisation has always avoided the decline phase. The company has based its pricing strategies on product differentiation. It can be argued that the prices are higher than that of the competitors but the brand value and the product and service differentiation allows the company to enjoy such higher pricing strategies (Clifton, 2009). The company has a keen focus on quality and sources its coffee beans from some of the best plantations in Brazil. The company has also focussed on the youth appeal and calls its stores the ‘third place’ in order to connect with the youth. Starbucks has also created a community and people are encouraged to discuss about their experience at Starbucks. This forms an excellent
platform for its promotions. The strong brand value and brand image has made it possible for the organisation to adopt market development as a growth strategy. It has its presence in 55 countries with over 17000 retail stores. The company also has strategic partnerships with suppliers, hospitality and aviation industry and retails through supermarkets and malls. Multiple distribution channels have been majorly responsible for the success of the organisation (Crofts, 2012).
1.6 Competitor profile
The analysis of the strengths and weaknesses of the competitors is important for deciding upon the marketing strategies of a company. Starbucks being in the coffee chain industry faces strong competition from many other enterprises selling similar products and services. Its strongest competitors have however been McDonalds and Peets. Starbucks has been facing strong competition from the introduction of a coffee line named McCafe by McDonalds and the increased presence of Peets in different locations. Starbucks also faces competition from Brinker International, Inc, Wendy’s International, Inc, and KFC Corporation etc (Fedrick, 2006). But although Starbucks faces strong competition from some of the major food chain business in the industry it has always focused on developing its products and services and bringing in innovation to its products so as to differentiate its products from others in the industry. Some of the major competitive advantages of Starbucks can be described as its cost leadership, differentiation strategies, cost focus and focused differentiation strategies. Starbucks being an old player in the coffee chain business has always focused on cost leadership and thus has been able to come up with competitive prices in the market (Fifield, 2007). With its focus on product and service differentiation the company has always welcomed new ideas and put them into practice. Their unique services and ambience at their stores have always helped them differentiate from their competitors. The introduction of new instant coffee has been a low cost alternative to the Starbucks regular coffee and the in store brewing facilities used in Starbucks stores along with the gift items has helped Starbucks to attain the focused differentiation in the market.
1.7 Brand Industry
Brand Value and Branding strategies are majorly responsible in generating customer loyalty. Brand Loyalty ensures lesser sensitivity towards price fluctuations and hence is profitable for the business. But however with Branding strategies quality becomes a key concern. Any difference or gap between the perceived quality and the actual quality can be harmful for the brand image. Star Bucks has been very careful about its product quality and innovation strategies. The company started its operations in 1971 and entered the UK market in 1992. A strong focus on the consumer behaviour and innovating accordingly has meant success for the organisation. The company at present has an annual turnover of £1.6 billion and an estimated market share of 33% in the coffee shop industry in the United Kingdom. The company focuses on promotional and branding strategies and also ensures that the customers are associated with the brand. The ‘third place’ appeal has been successful in connecting with the target segment. Further it also invests in Customer Relationship Management (CRM) applications in order to ensure the effective feedback of the customers. The strong brand value and brand image has provided Starbucks with success and growth (Graham, 2008).
Task B
2.0 Internal Analysis
The Strengths and Weaknesses (exhibit 5) of the company form the analysis of the internal environment of Starbucks. Starbucks went public in the year 1992 and by 1997 the organisation had a substantial growth. It was successful in capturing both high market growth and high market share. The BCG matrix has been discussed later to illustrate the product portfolio (Horne and Doherty, 2010). The Strengths for the organisation have been as follows:
Different range of products: The diversified product range ensures that it is capable of catering to various sections and various tastes. Innovation has been a major strength for the company
A very strong brand image and brand loyalty ensures its success in market development and organic growth strategies
It has a very effective communication tool and process to gather feedback from the consumers
Internationalisation and Geographic diversification provides the organisation a shield against economic fluctuations in a particular area
Training and development of the employees has resulted in high level of service standard and customer satisfaction (Hutton, 2001).
The weaknesses of the organisation can be summed as follows:
The company has been focusing majorly o expansion strategies and as a result the internal focus has been neglected
The expansion and internationalisation can also be considered to be a threat because the ideas and concepts can be stolen by competitors
Competition has been high in this industry and the threat and challenges from the competitors and rivals (as discussed in the five forces model) are a constant threat (Joseph and Mahaptra, 2009).
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It has a range of products and many products are in the question mark category. This is a real negative for the company and it needs to focus on such products
The company has also made risky investments at several locations and these can be challenging in the future
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