Starbucks case study 3

Starbucks dates back from 1971 and is based in Seattle, Washington. The company was founded by Gordon Bowker, Jerry Baldwin and Zev Siegl and it started as a local coffee bean roaster and retailer. Since its birth, Strabucks has experienced a rapid growth and by 1987 the company reached a total of 17 stores (Starbucks 2012). Around 1987 the company was sold to Howard Schultz. He merged Starbucks with Giornale, thus creating Starbucks Corporation. Nowadays, the company runs worldwide and has passed the 18,000 store mark, distributing their products on all continents in over 60 countries (Starbucks 2012).

The company has gained its brand reputation by offering a wide and innovative range of products, such as: hot and cold drinks, coffee beans, salads, hot and cold sandwiches, sweet pastries, snacks, but also items like mugs and tumblers (Starbucks 2012). III. CASE STUDY ANALYSIS Based on the curriculum studied throughout the module and the undertaken research on Starbucks, this essay will analyse, examine and assess the competitive strategies pursued by Starbucks over time and how it has achieved (or not) aligning its competitive strategy with its corporate growth ambition of market penetration in the US. . STRATEGIC POSITIONING AND MARKETING MIX The consumer defines the position of a product on the basis of numerous criteria, such as price, competitor, quality, product class and others (Kotler and Armstrong 2004). Starbucks managed to distinguish itself amongst competitors with its high quality products and innovative customer experience, which proved to have given them an important strategic advantage. One of the main features that differentiated them from competitors is that they offered “a neighbourhood gathering place” (Starbucks 2012).

Starbucks was no longer a place where people could just buy coffee, tea or have treats, because it became a part of the customer’s daily routine – something inseparable. Additionally, in the 1980s people became brand sensitive and as a result, companies had to change their strategy. Thus, Starbucks found themselves replacing transactional marketing with relationship marketing, where the customer’s opinion became, what they considered to be, one of the factors that could push a company to the top in the market (Kotler 1986:119).

By presenting innovative products, creating high standards and offering excellent service, Starbucks managed to position themselves as a premium brand in the coffee industry (Gangadharan 2010). The company used TQM (total quality management), where all employees were continuously participating in improving the overall quality of products (Kanji 1996:7). For example, because their staff had to go through an “efficient” training, they were able to satisfy the customer’s expectations for the money they were spending (Gangadharan 2010).

Later on, the company started developing and offering new products, thus showing how cautious they were about keeping their high standard and maintaining their premium brand image. Usually the consumer uses the price of a product as an indicator of quality. That being said, Starbucks was perceived as an expensive brand with high quality products that were worth buying (Dalrymple and Parsons 1986:53). According to Brassington and Pettitt, the interaction between personnel and customers is of significant importance (Brassington and Pettitt 2000:81).

For example, Schultz realized how important it is that Baristas engage with customers, thus offering them the ‘Starbucks experience’. Additionally, promotion can be considered as a marketing strategy which helps the increase in sales (Shimp 1997:42). Starbucks attempted to establish a national monopoly without having to use advertising. They relied on organizing events and promoting their brand – by using mugs and T-shirts on which they printed artworks that were a reflection of a city’s personality. ii. PORTER’S FIVE FORCES

According to Michael Porter, “Every industry has an underlying structure, or a set of fundamental economic and technical characteristics, that give rise to these competitive forces” (Porter 1998:23). The forces mentioned above are: industry rivalry, threat of new entrants, threat of substitute products, bargaining power of suppliers and bargaining power of buyers. Additionally, Porter mentioned that: “Knowledge of these underlying sources of competitive pressure provides the groundwork for a strategic agenda or action” (Porter 1998:22).

By applying the industry rivalry concept, although Starbucks has other competitors, they are comparatively smaller and they often focus their business in certain areas or regions. Some of Starbucks’ competitors are Coffee People, Gloria Jean’s, Second Cup, which are currently expanding or planning to expand their businesses nationally or internationally. Starbucks is undoubtedly dominating the coffee industry, however that does not exclude the entry of new rivals. For example, McDonald’s, Burger King and Dunkin’ Donuts are challenging Starbucks’ monopoly in the industry.

Although it is fairly easy to access the coffeehouse industry, Starbucks has set the standards high and the majority of businesses which enter this segment of the market have hard times coping with the already set specifications. Brand image and product differentiation plays an important part in relation to threat of substitute products. The overall idea of a coffeehouse is not only about the coffee, but it is also about the decor and the ambience, like the one Starbucks is offering. Thus, the threat of substitute product is not considered to be significant in this context.

According to Porter’s buyers’ bargaining power force the customer is the most powerful force in the industry. In the case of Starbucks and the coffeehouse industry, the biggest purchasers are represented by the individual consumer and these tend to be less price sensitive (Larson 2008:101). Thus reducing their bargaining power. Similar to buyers’ bargaining power, suppliers’ bargaining power loses ground to players in the industry because of the high number of coffee farms spread across the world (Larson 2008:101).

Hence, there is a high number of suppliers, players like Starbucks, that have bigger profits, thus having a bigger influence on the market and reducing the bargaining power of suppliers. iii. SWOT ANALYSIS SWOT analysis is a tool used by companies to identify strengths (S) and weaknesses (W) within a company, but also the external opportunities (O) and threats (T) the company might face in that specific market segment. Besides aiding companies to identify their strategic position, this tool also helps them amend changes to their strategies (Management Study Guide 2012).

Starbucks’ flawless brand image and reputation is the main strength of the company. Although the company sells its products at a premium price, they manage to retain their customers because of the ‘Starbucks experience’. “The coffee is unique and tasty, but it is not the only reason I like to visit each day. The place has energy and it is well run” (Motley 2007:43). Determined by the present economic situation, the main weakness that Starbucks is facing is the premium priced products. Although, their targeted audience is middle to high income individuals, the current situation aids the consumer to become price sensitive (Velta 2008).

Although the current economic situation does not work in favour of any company, Starbucks had an increase of six percent in its operating income and a two percent decline in profits in the 2009 Second Quarter Report, compared to the same period in the previous year (Fiscal Annual Report 2009). Although Starbucks had a decrease in revenues, they could still increase the capital in the international consumer product segment, which consequently results in an opportunity for success. From a financial resources point of view, McDonald’s and Dunkin’ Donuts can be considered an equal rival to Starbucks.

The companies mentioned above have the resources and capabilities to counterpart Starbucks. Due to the current economic situation, the company risks damaging its brand image because of their continuous premium prices for their products. Hence, this is one of the threats Starbucks is facing. iv. EXTERNAL ENVIRONMENTAL FORCES – PEST ANALYSIS PEST analysis is a tool which helps companies examine the external environment factors and offers insight context in relation to them. This tool consists of analysing the Political, Economic, Social, Technological factors, which are closely correlated (InfoKits 2008).

From a political point of view, Starbucks can thrive or can be seriously affected by the political decisions made. Taxation policy, deregulation in legislation, international stability, employment law, are all factors that have an impact on companies. Also, due to the downturn of the economy, governments have been forced to take certain measures, which have not always been in the benefit of companies. Economic growth, inflation rates, RPI (Retail Price Index), globalization, exchange rates can all be characterized as economic factors. Being closely related, they can impact on the prices companies charge their customers.

Although, Starbucks is aware of the current economic situation, they keep on charging customers premium prices. When considering the social factor, Starbucks should have a look at the income distribution. Buyers’ power has dropped considerably compared to previous years, but the company keeps on charging premium prices. Even though, customers used to be non-price sensitive, that trend started to change and they started becoming price sensitive. The technological factors, like all other factors, can have a positive impact on Starbucks.

In the short-term, they can prove to be expensive, but in the long-term they can reduce overheads, increase production performance and cost, but also overall improve the ‘Starbucks experience’. Although Starbucks faces numerous external factors, the company continuously analyses and tries to adjust its competitive strategies within the coffeehouse industry. IV. CONCLUSIONS According to Starbucks’ Mission Statement: “Our mission: to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time” (Starbucks 2012), their most valuable asset is their customers.

Customers’ expectations change in accordance with the changing market conditions. Consequently, as Drucker says: “It is the customer that determines what a business is. ” (Drucker 1954:37). Due to the current downgrade of both internal and external factors, Starbucks should revise its competitive strategy ambitions and strive to bring improvements to its business model in order to remain the leader in the coffeehouse market. If they fail to do that they will lose their segment market leader position. Therefore, it is unavoidable to integrate the customers’ need in their future strategies.

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