1. Walter Barré - 14425342
THE UNIVERSITY OF NORTHAMPTON
WORD COUNT: 2753
Strategic Management
STRM047-SPR
CASE STUDY: STARBUCKS 2012
1 APRIL 2015
2. 1
Contents
1. Introduction..................................................................................................................................... 2
2. Business model & business strategy of Starbucks........................................................................... 2
2.1. Business model........................................................................................................................ 2
2.2. Business strategy..................................................................................................................... 4
3. Core competencies assessment and critical success factors of Starbucks...................................... 5
3.1. Core competencies assessment .............................................................................................. 5
3.2. Critical success factors............................................................................................................. 7
4. Personal assessment of Starbucks strategy .................................................................................... 9
5. Conclusion ..................................................................................................................................... 11
6. References..................................................................................................................................... 12
7. Appendices.................................................................................................................................... 13
Appendix 1: The Business Model Canvas of Starbucks ..................................................................... 13
Appendix 2: Starbucks’ share price from 2004 to 2012.................................................................... 13
Appendix 3: Porter’s Value Chain...................................................................................................... 14
Appendix 4: Starbucks’ VRIN analysis................................................................................................ 15
Appendix 5: Porter’s five forces ........................................................................................................ 16
3. 2
1. Introduction
Since its creation Starbucks has risen to become the world’s leading coffeehouse
company by delivering the finest coffee with superior customer service in a unique
place – that is “Starbucks Experience”. So, how did Starbucks build its success?
Firstly, it is necessary to look at Starbucks’ business model and its business
strategy. Then, it is required to assess its core competencies and identify critical
success factors that allowed Starbucks to deliver its unique value proposition.
Afterwards, this report will include the personal assessment of the author towards
Starbucks’ strategy. Finally, a conclusion and some recommendations will end the
report.
2. Business model & business strategy of Starbucks
2.1. Business model
A business model defines how an organization produces, distributes and captures
value to generate income. One of the strategic management tools to describe a
business model is the Business Model Canvas. This particular tool enables to clearly
describe, conceive, and analyze an organization’s business model (Appendix 1).
Firstly, value proposition is the center of the business model. The value proposition
of Starbucks is to encourage and entertain the human spirit. As a result, Schultz
created the “Starbucks Experience”. It is defined as a third place in-between home
and the workplace, where customers can appreciate drinking good coffee and take
part in social event. To emphasize the “Starbucks Experience”, the company value
high quality coffee, and superior customer service.
Secondly, the Business Model Canvas includes the customer’s perspective.
Starbucks customers are mainly coffee lovers, professionals between 25 and 40
years old, who want a place to unwind and work peacefully and students between
18 and 25, that also want a place to relax, study and, or meet friends (O'Farrell,
2015).
Thirdly, it is crucial that Starbucks develops a strong relationship with its
customers. Besides, Schultz stated that Starbucks provides a superior customer
service primarily by recruiting the right employees who are decisive in providing
the “Starbucks Experience” (Schultz, 2012).
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Finally, Starbucks uses different channels of distribution. Yet, Starbucks holds its
own retail stores. Besides, the company has the ability to adapt its stores to the
environment in terms of size and format. Thereby, Starbucks has lead the market
in the US with about 10,000 outlets in 2011 (Grant, 2013). Starbucks also sales
its products through licensed stores. (Schultz, 2012).
Fourthly, it deals with the activity perspective. One of the key activities includes
coffee purchasing and roasting. Another key activity is the management of
Starbucks stores. Accordingly, it implies to effectively hire and train employees to
deliver “Starbucks Experience”.
The key resources needed for those activities are mainly employees as mentioned
previously. In addition, stores design, location, and facilities are required to deliver
the value proposition. Further, coffee machine is also a key resource to make high
quality coffee.
Eventually, Starbucks’ partners are obviously coffee growers, coffee machine
makers, and licensed stores. Furthermore, Grant stated that “employees who were
committed to the principles and values of Starbucks, required the company to
regard its employees as business partners” (Grant, 2013: 448). As such,
employees can be seen as key partners, as they are deeply involved in delivering
the value proposition.
The last aspect is the financial perspective. Starbucks’ source of revenue results
especially from the sales of its retail stores (e.g. $9,632.4 million) and also from
its licensed stores (e.g. $2068.0 million) (Grant, 2013: 446).
Finally, the cost structure resulting from the activity perspective covers cost of
products and furniture, stores’ rent and maintenance, employees’ hiring, training
and remuneration, and costs related to key partners.
To sum up, Starbucks’ business model is clear and seems well implemented. The
different perspectives are interrelated which is fundamental for a business model
to be effective. Although the Business Model Canvas is a useful tool, it is important
to define Starbucks strategy that is essential to deliver the value proposition.
5. 4
2.2. Business strategy
Porter’s generic strategy is fundamental to define a business strategy. It is
composed of three main strategy – cost leadership, differentiation and focus.
Porter’s differentiation focus strategy is defined by a company providing
differentiated products or services to a specific target market.
As mentioned earlier, Starbucks’ value proposition is to “inspire and nurture the
human spirit – one person, one cup and one neighbourhood at a time” (Schultz,
2012: 447). To deliver that value proposition, Starbucks centered its strategy on
“Starbucks Experience” providing customers with a unique place. As a result,
Starbucks’ business strategy suggests a differentiation focus strategy.
Since its beginning till 2007, Starbucks has built strategic relationship with its
suppliers and employees, and expanded across the world, introducing new stores,
products, and activities (e.g. VIA, music, books, ec.). Starbucks also extended its
portfolio by adopting horizontal strategy (e.g. Tazo Tea, Seattle’s Best Coffee,
etc.). Consequently, the company developed a high degree of brand awareness
which in turn, brought new customers in board like kids and teens (O'Farrell,
2015). This can be seen as a diversification strategy. Indeed, as defined by Daidj
(2014) diversification strategy is used by companies to expand their business
activities into new markets. This change in Starbucks’ strategy may explain why
the company had experience trouble in 2007, in addition with the financial crisis
of 2008. Yet, Starbucks share price decreased seriously by 75% between 2007
and 2009 (Appendix 2).
In 2008, Schultz decided to review Starbucks’ strategy. The revised strategy has
been based on two main thrusts. The first thrust suggested an effective cost
management. Eventually, Schultz undertook actions to cutoff unnecessary costs.
Firstly, he decided to rethink about new stores openings in the US. In the
meantime, Schultz closed about 600 US stores along with the greater number of
its stores in Australia. Those closures ended in 6,000 jobs losses. However, by
these actions, Starbucks has been able to reduce its operations costs by $500
million in 2009 (Grant, 2013) and thereby saves millions of dollars.
The second thrust was to reaffirm Starbucks’ value and refresh the “Starbucks
Experience”. It has been possible by “reinvigorating Starbucks’ social
commitment” (Grant, 2013: 450) and reemphasize Starbucks’ principles to its
employees.
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Schultz also changed some aspects of management of chain to better serve
customers. One key change was a transition from its coffee machine “La Marzocco”
to automatic coffee machine. That enabled Starbucks to enhance time efficiency.
An update of Starbucks food menu has also been made. That change allowed
Starbucks to better align the food menu to the high quality coffee. So, it reinforced
the initial value proposition.
To conclude, through this turnaround strategy Starbucks reemphasized the quality
of its coffee and its superior customer service to its customers. Thus, Schultz
enabled Starbucks to readjust its strategy with its value proposition, and recover
a differentiation focus strategy.
Porter’s generic strategy is enabled by developing or improving particular business
competencies. As a result, a company is able to perform particular business
activities better than its competitors (Sehgal, 2011). Therefore, it is important to
identify critical success factors to better enhance sustainability.
3. Core competencies assessment and critical success factors of
Starbucks
3.1. Core competencies assessment
Prahalad and Hamel (1990) came with the idea that core competencies are “areas
of specialized expertise that is the result of harmonizing complex streams of
technology and work activity” (Naylor, 2001). Further Barney (1991) stated that
core competencies should enable a company to develop sustainable competitive
advantages. It can be inferred that a company have to focus on recognizing and
utilizing its core competencies to develop competitive advantage.
Porter (1985) introduced a method to distinguish the various activities operated
by a company – the value chain (Appendix 3). The value chain analysis enables a
company to figure out particular activities of its operations that add value to the
customers.
The value chain of Starbucks can be defined into two main levels – primary
activities and support activities. The primary activities – Starbucks inbound
logistics implicates the selection of coffee beans suppliers, information on quality
standards, building strategic relationships with its suppliers and controlling the
supply chain management. Then, Starbucks operates in more than 50 countries
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by its company-operated stores and licensing. Actually, in 2011 Starbucks licensed
stores were accountable for 9% of overall sales revenue, while company-operated
stores represented 82% of its sales revenue (Grant, 2013). So, Starbucks’
outbound logistics is mainly involving sales of its products via its own stores and
slightly through licensed stores. Regarding marketing Starbucks relies on social
media and its brand awareness rather than mass advertising. In terms of service,
Starbucks provides superior customer service mainly through its employees and
extra services (e.g. facilities, “Starbucks Experience”).
The support activities – Starbucks’ infrastructure is composed of various
departments like management, finance, legal support and so on, these are needed
in order to effectively organize management of chain (Dudovskiy, 2012). Then,
Human Resource Management is based on developing a strong relationship
between the company and employees. Starbucks looks after its employees,
making sure that they are satisfied and receiving adequate trainings (Dudovskiy,
2012). Also, Starbucks make use of technology, for instance, Starbucks replaced
its previous coffee machine by automatic coffee machine, provides free Wi-Fi to its
customers and has developed apps to facilitate customers payment and orders.
Finally, procurement involves Starbucks to purchase mainly coffee beans from
various suppliers and ensure that the raw materials are of high quality and meet
its standards. Other items like furniture, food etc. are part of Starbucks
procurement.
From Starbucks business model and strategy along with the value chain analysis,
it can be assumed that Starbucks core competencies are based on its inbound
logistics, marketing and sales, service, and human resource management.
A more analytical tool for recognizing core competencies is the VRIN framework -
Valuable, Rare, Inimitable, Non-substitutable (Barney, 1997). Geereddy stated
that sustainable competitive advantage is only achievable if a company has
resources that can meet the four features of VRIN framework (Geereddy, 2013).
For Starbucks VRIN analysis please refer to Appendix 4.
To summarize, the VRIN analysis confirms the assumptions that have been made
earlier. Consequently, it can be concluded from the value chain assessment and
the VRIN analysis that Starbucks core competencies are based on its inbound
logistics, marketing & sales, services, and Human Resource Management.
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Having in mind Starbucks core competencies, it is fundamental to identify critical
success factors necessary for Starbucks to achieve its core competencies and
thereby create sustainability.
3.2. Critical success factors
Critical success factors are restricted amount of factors, or variables that
contribute directly to the effectiveness and efficiency of an organization in
achieving its objectives (Boynton and Zmud, 1984). In order to identify those
critical success factors, SWOT analysis can be a useful tool.
So, it is fundamental to undertake a SWOT analysis of Starbucks so as to identify
critical success factors that can affect its core competencies and its value
proposition. Thereafter is Starbucks’ SWOT:
STRENGTHS
- Unique relationships with its suppliers – Starbucks has built a strong relationship by taking care and being involved
(e.g. Farmer Support Centre). Thereby, Starbucks can rely on its suppliers for high quality coffee beans.
- Brand awareness and recognition – Starbucks is present in more than 50 countries and has built a strong customer
loyalty with loyalty programs (e.g. card, apps, etc.). As such, Starbucks has gain a great reputation and loyalty.
- Superior customer service – Through its employees, Starbucks is able to provide a superior customer service.
Consequently, it contributes to high degree of customer satisfaction.
- Shops design and location – Starbucks aims to deliver “Starbucks Experience”, which give customer a unique place to
enjoy the finest coffee and involve socially. That is part of the differentiation focus strategy.
- Human resource management (HRM) – Yet, Starbucks HRM is dedicated to hire and train employees according to
Starbucks value and principles. Also, Starbucks takes seriously its employees and regards them as co-partners. That in
turn, leads employees to be dedicated to customers and deliver Starbucks value proposition at its best.
WEAKNESSES
- Products costs – Starbucks has chosen a premium price strategy. As a result, Starbucks products are expensive and
therefore customers could seek lower price and go to competitors. Hence, Starbucks could lose customers and more
severely market share for the benefit of competition.
- Coffee beans price – Starbucks business clearly depends on coffee beans price. Starbucks cannot control price of
commodities. If there is inflation, it will harm the business as it will affect products price at the end.
- Overgrown – Starbucks has expanded too much, especially in the US. As a consequence Starbucks long-term growth is
compromise. The company is slowing down itself by having too many stores in the same place.
- Reliance – Starbucks is relying on its stores in the US with 9031 shops in 2011. Hence, it is dangerous for Starbucks only
to rely on the US coffee industry growth. If US customer’s needs change, Starbucks will be in trouble.
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OPPORTUNITIES
- Enlargement in developing markets – With so many stores in US, Starbucks has to expand overseas. Indeed, Starbucks
has a real opportunity in emerging markets like China, or India. The company can even more compete and grow.
- Extension of value proposition – Starbucks already began to extend its offer (e.g. VIA, Tea, fresh juice, etc.). It gives the
company opportunities to develop its partnerships with licensed stores and gain market share.
- Licensing – Here, Starbucks has potential growth with licensing. As said above, the company can further its strategy on
licensed stores and thereby increase its sales.
- Technology development – Starbucks already make use of apps, and mobile payment. Here is an opportunity for
Starbucks to enhance its technology base and improve customer’s “Starbucks Experience”. Technology can improve
management process and make it easier for customer to appreciate “Starbucks Experience”.
THREATS
- Competition – It is one of the most important threats. Starbucks is evolving in a really competitive market. Competition
is increasingly growing and aggressive (e.g. McDonalds, Costa Coffee, Nero, etc.). Thus, it could be difficult for Starbucks
to follow the path. Besides, customers could be more attracted by new offers from competitors.
- Customers – Customers can be a threats in economic situations by going to competitors with lower price. Or, just a
changing habits in customer lifestyle.
- Emerging markets – Competition is even now present and there is already an overload in the coffee market.
Source: Grant, R. (2013). / Geereddy, N. (2013).
Eventually, some of the strengths that has been identified in Starbucks’ SWOT
analysis are critical success:
- Quality of products: Starbucks evolves in a competitive market where
customers seek coffee that would differ from any competitor. Further,
Starbucks’ customer segment includes coffee lovers, and as such Starbucks
need to provide the finest coffee beans.
- Relationship with suppliers: Yet, in order to provide the finest coffee
beans, Starbucks has to build a strong and unique relationship with its
suppliers that competitors won’t be able to imitate.
- Customer service: Competitors are aggressive and competition increases.
Hence, Starbucks must provide superior customer service so as to keep a
high degree of customer satisfaction.
- Customer loyalty: Customer are generally sensitive to special offers, or
specific attention. For that reason, Starbucks has to retain its customers by
developing or improving loyalty program.
- Human resource management: If Starbucks aims to deliver superior
customer service, it is essential that the company hires the right employees
and share its value and principles to them. In turn, those employees will
reflect Starbucks’ values at its best.
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To conclude, it can be deduce from the SWOT analysis that the critical success
factors – quality of products, customer service, customer loyalty and human
resources management – are associated to the core competencies. Thereby, it
clearly confirms the findings in the question 3.1.
4. Personal assessment of Starbucks strategy
As we have seen earlier in this report, Starbucks has adopted a differentiation
focus strategy. Thus, Starbucks is able to meet and to better service its segment
of customers. Thereby, Starbucks benefits from a high level of customer
satisfaction and loyalty. This in turn implies that Starbucks has the ability to retain
its current customers. As a result, Starbucks applies a high cost onto products by
positioning itself as premium pricing strategy. As a consequence, Starbucks has
achieved high results of operations increasing its net revenues from $7,786.9
million in 2006 to $11,700.4 million in 2011 (Grant, 2013: 446). Thus, as far as
that goes, Starbucks strategy is successful and allows an effective market
penetration.
However, Starbucks’ differentiation focus strategy is not “foolproof” as the
company has to deal with risks like imitation or changes in customer’s
requirements.
By using Porter’s five forces (Appendix 5), we can analyze the industry in which
Starbucks evolves. Yet, it may be useful to assess Starbucks’ strategy and its
performance within the market.
The results on question 3.1 show that Starbucks can create barriers to entry and
minimize the effect of new entrants. Core competencies like ‘inbound logistics’
could prevent competition from purchasing the finest coffee beans, getting lower
quality. Further Starbucks delivers superior customer service that some potential
companies may not be able to provide. Finally, Starbucks offers a unique
experience that cannot be copied and rise barriers.
Moreover, with differentiation focus strategy Starbucks has built customer loyalty
which can reduce buyer’s power. Actually, Starbucks’ customers are inclined to
favored Starbucks products rather than those of competition. They already know
that Starbucks delivers a unique place to consume high quality coffee with superior
11. 10
customer service. Thus, Starbucks’ customer are willing to pay the price to get
what Starbucks offers.
Then, supplier power can be qualified as medium to low as Starbucks is able to
retrieve an increase in price by its premium pricing strategy. However, its profit
will decrease, so Starbucks should not underestimate its suppliers.
Back to question 2.2 Starbucks strategy can minimize threat to substitutes.
Starbucks target market is well defined and thus, the company is able to fully
understand and serve its customer. Besides, diversification in its offer allows a
wider range of product to deliver to its customers.
Then, it is inferred that rivalry does not have the ability to encompass customer
needs (Quickmba.com, 2010). However, this is controversy in that, competitors
can develop core competencies that Starbucks does not have. Indeed, competitors
could develop competitive advantage that Starbucks do not have, or could do
better in specific activities. Then, Starbucks may not be able to compete, and its
market share may decrease. For instance, Dunkin’ Donuts has a really strong
brand positioning and heavily use advertising while Starbucks only use social
media. McDonald’s has also launch “McCafé” to compete with Starbucks adopting
aggressive actions and advertising. McDonald’s has a fast response to competition,
something that Starbucks may not have. Further McDonald’s has a strong global
sustainability commitment to the community alike Starbucks. Finally, Caribou
Coffee has also chosen differentiation focus strategy offering differentiated
products of high quality and unique experience to compete with “Starbucks
Experience” (UK Essays, 2013).
To sum up, Starbucks has a strong positioning within its market and has been able
to stand ahead from its competitors by its unique value proposition. This position
was reached by developing and enhancing core competencies. Starbucks was
accurate in identifying critical success factors that would align customer’s
requirements with its value proposition. Nevertheless, competition is increasingly
aggressive and imitates competences to frighten other companies in the market
and gain market share. Even though Starbucks is leading the market, the company
has to constantly enhance its core competencies.
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5. Conclusion
Starbucks mission is to “inspire and nurture the human spirit – one person, one
cup and one neighborhood at a time” (Grant, 2013: 447). For that reason,
Starbucks has adopted a differentiation focus strategy to better serve its segment
customer. It has been successful due to its ability to design its business model
(Question 2.1 and appendix 1). Furthermore, Starbucks has developing core
competencies (Appendix 4) that are strong potential competitive advantage which
gives the company a strong positioning into the market. However, Starbucks
evolves in an aggressive competitive market and as such, the company have to
make sure that its value proposition is supported by its strategy.
As recommendations, Starbucks should control its cost management to not
replicate mistakes that occurred before 2008. As Starbucks is expanding
internationally, it is recommended that the company keeps quality and superior
customer service at its best rather than looking for mass stores openings. As a
whole, Starbucks must adjust its strategy with its customer requirements.
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6. References
Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal
of Management, 17(1), pp.99-120.
Boynton, A. and Zmud, R. (1984). An Assessment of Critical Success Factors. Sloan
Management Review, [online] pp.17-18. Available at:
http://as.nida.ac.th/~waraporn/resource/704-1-50/Readings/6-
Assessment%20CSF-Boynton-Zmud.pdf [Accessed 28 Mar. 2015].
Daidj, N. (2014). Developing strategic business models and competitive advantage
in the digital sector. Hershey PA: Business Science Reference.
Dudovskiy, J. (2012). Starbucks Value-Chain Analysis. [online] Research-
methodology.net. Available at: http://research-methodology.net/starbucks-value-
chain-analysis/ [Accessed 27 Mar. 2015].
Geereddy, N. (2013). Strategic Analysis Of Starbucks Corporation. Master.
Harvard University.
Grant, R. (2013). Contemporary strategy analysis - Case 2 Starbucks Corporation.
8th ed. Chichester: John Wiley.
Hill, C. and Jones, G. (2010). Strategic management cases. Mason, OH: South-
Western/Cengage Learning, p.43.
Mindtools.com, (2015). Porter's Value Chain: Understanding How Value is Created
Within Organizations. [online] Available at:
http://www.mindtools.com/pages/article/newSTR_66.htm [Accessed 27 Mar.
2015].
Naylor, R. (2001). Core Competencies - What They Are and How to use Them.
[online] Web.stanford.edu. Available at:
http://web.stanford.edu/dept/SUL/library/institute21/summer/speakers/trelstad_
mag.html [Accessed 27 Mar. 2015].
O'Farrell, R. (2015). Who Is Starbucks' Target Audience?. Houston Chronicle.
[online] Available at: http://smallbusiness.chron.com/starbucks-target-audience-
10553.html [Accessed 25 Mar. 2015].
Quickmba.com, (2010). Porter's Generic Strategies. [online] Available at:
http://www.quickmba.com/strategy/generic.shtml [Accessed 29 Mar. 2015].
Sehgal, V. (2011). Supply chain as strategic asset. Hoboken, N.J.: Wiley.
UK Essays. (2013). Competitor Analysis And Contemporary Trends Starbucks
Marketing Essay. [online]. Available from:
http://www.ukessays.com/essays/marketing/competitor-analysis-and-
contemporary-trends-starbucks-marketing-essay.php?cref=1 [Accessed 29 March
2015].
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7. Appendices
Appendix 1: The Business Model Canvas of Starbucks
Source: (Barre, 2015).
Appendix 2: Starbucks’ share price from 2004 to 2012
Source: (Grant, 2013).
Sales of its company-operated stores
Products and furniture
Stores' rent and maintenance, etc.
Employees
Coffee machine
Employees
Distributors
Coffee machine makers
Coffee growers
Sales of its retail stores
Company-operated stores
Coffee roasting
Stores maintenance
Human Resources and
management of chains
Stores design, location,
facilities, etc.
Employees
Coffee lovers
Students, 18-25 years
old, who want a place to
relax, study and meet
friends
Superior customer
service for high
satisfaction and loyalty
Employees dedicated
and long-term
Retail stores
Cost structure Revenue
Activity perspective Customer perspectiveProduct / service
Financial perspective
"Starbucks Experience"
Encourage and entertain
the human spirit in a
third place in-between
home and office
Unique coffee qualtity
Key partners Key activity Value proposition Customer relationship Customer segment
Distribution channelKey resources
Professionals, 25-40
years old, who want a
place to relax and work
quitly
16. 15
Appendix 4: Starbucks’ VRIN analysis
Source: (Barre, 2015).
Resources and competencies of
Starbucks
Valuable Rare Inimitable Non-Substitutable Implications
Inbound logistics
- Selection of coffee beans suppliers, high
quality standards
- Unique relationships with suppliers
- Controlling the supply chain management
Yes Yes Yes Yes
Core competencies –
Source of Competitive
advantage
Operations
- Present in 50 countries via company-
operated stores and licensed stores
- Effective cost management
Yes Yes No Yes
Temporary competitive
advantage
Outbound logistics
- Sales through its operated stores and
licensing
- Few intermediaries
Yes No No Yes
Temporary competitive
advantage
Marketing & Sales
- Social media, fidelity program (Starbucks
Card etc.)
- Rely on superior quality products and
services
- Located in high-traffic and visible areas
- Brand awareness/recognition, brand
equity
- Designs and ambiance of stores:
“Starbucks Experience”
Yes Yes Yes Yes
Core competencies –
Source of Competitive
advantage
Services
- Superior customer service leading to
loyalty
- Employees dedicated to the customers:
“Starbucks Experience”
- Development strong relationship
Yes Yes Yes Yes
Core competencies –
Source of Competitive
advantage
Infrastructure
- Effective organization of management of
chain
Yes No No Yes
Temporary competitive
advantage
Human Resource Management
- Great care of employees (trainings etc.)
- Tailored recruitment
- Development of strong relationship
between the company and employees
Yes Yes Yes Yes
Core competencies –
Source of Competitive
advantage
Technology development
- Starbucks unique apps, Free Wi-Fi
- Investment in technology (Coffee
machine etc.)
Yes Yes No Yes
Temporary competitive
advantage
Procurement
- Purchase coffee beans, raw material ,
furniture, food, etc.
Yes No No Yes
Temporary competitive
advantage
