Ge9 cell matrix (2)

S.P. MANDALI’S
R. A PODAR COLLEGE OF COMMERCE AND ECONOMICS
MATUNGA, MUMBAI-400 019.
A PROJECT REPORT ON
General Electric (GE) Nine Cell Matrix
SUBMITTED BY
RUTUJA D. CHUDNAIK
M.COM (SEM. I): STRATEGIC MANAGEMENT
SUBMITTED TO
UNIVERSITY OF MUMBAI
2014-2015
PROJECT GUIDE
Prof. Dr. B.B. Kamble

Strategic Management
S.P. MANDALI’S
R. A PODAR COLLEGE OF COMMERCE AND ECONOMICS
MATUNGA, MUMBAI-400 019.
CERTIFICATE
This is to certify that Mr/Ms. Name Rutuja D. Chudnaik of M.Com ( Business Management/
Accountancy) Semester I (2014-2015) has successfully completed the project on Strategic
Management
under the guidance of Prof. Dr. B.B. Kamble
Project Guide/Internal Examiner External Examiner
Prof. _______________________ Prof. ________________________
Dr. (Mrs) Vinita Pimpale Dr.(Mrs) Shobana Vasudevan
Course Co-ordinator Principal
Date Seal of the College

ACKNOWLEDGEMENT
I acknowledge the valuable assistance provided by S. P Mandali’s R. A. Podar
College of Commerce & Economics, for two year degree course in M.Com.
I specially thank the Principal Dr.(Mrs) Shobana Vasudevan for allowing us to use
the facilities such as Library, Computer Laboratory, internet etc.
I sincerely thank the M.Com Co-ordinator for guiding us in the right direction to
prepare the project.
I thank my guide Prof. Dr. B.B. Kamble who has given his/her valuable time,
knowledge and guidance to complete the project successfully in time.
My family and peers were great source of inspiration throughout my project, their
support is deeply acknowledged.
Signature of the Student

DECLARATION
I, Rutuja D. Chudnaik of R. A. PODAR COLLEGE OF COMMERCE &
ECONOMICS of M.Com SEMESTER I, hereby declare that I have
completed the project General Electric (GE) Nine Cell Matrix
in the academic year 2014-2015 for the subject Strategic Management .
The information submitted is true and original to the best of my knowledge.
Signature of the Student

INDEX
SR. No.
PARTICULARS
PAGE NO.
1.
GE/McKinsey Matrix –INTRODUCTION
BRIEF HISTORY
01
2.
THE APPROACH – FACTORS AFFECTING INDUSTRIAL ATTRACTIVENESS AND BUSINESS STRENGTH
05
3.
APPLICATION OF GE NINE CELL MATRIX
13
4.
CASE STUDY – STARBUCKS
18
5.
REFERENCE/ BIBLIOGRAPHY
43

General Electric (GE) Nine Cell Matrix
GE/McKinsey Matrix
INTRODUCTION
The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix used to perform business portfolio analysis as a step in the strategic planning process.
The GE/McKinsey Matrix identifies the optimum business portfolio as one that fits perfectly to the company's strengths and helps to exploit the most attractive industry sectors or markets.
Thus, the objective of the analysis is to position each SBU on the chart depending on the SBU's Strength and the Attractiveness of the Industry Sector or Market on which it is focused. Each axis is divided into Low, Medium and High, giving the nine-cell matrix as depicted below.

SBUs are portrayed as a circle plotted on the GE/McKinsey Matrix, where the size of the circle represents a factor such as Market Size.
The GE/McKinsey Matrix differs from other tools, like the Boston Consulting Group Matrix, in that multiple factors are used to define Industry Attractiveness and Business Unit Strength.
Each factor can be given a different weighting in calculating the overall attractiveness of a particular industry.
Typically:
This template allows the user to define up to 10 SBUs to be plotted. Up to 10 different factors can be used to define Industry Attractiveness; Typical factors would be Market Size, Market Growth Rate, Industry Profitability, Competitive Rivalry, etc.
Up to 10 factors can also be used to define SBU Strength. Typical factors are Market Share, Distribution Channel Access, Financial Resources, R&D Capability, etc
The factors and their relative weightings are selected. The rating values for each factor are entered for each SBU and Industry.
The SBU Strength and Industry Sector Attractiveness are calculated and the GE/McKinsey Matrix is automatically produced.
The format used to produce the Matrix is a MS-Excel Bubble Chart. Industry Attractiveness and Business Strength are plotted on the X and Y axes. The size of the Bubble allows a further factor to be depicted on the chart. The default factor used is Market Size. However, a Dropdown list is

available allowing the user to dynamically select any of the Industry Attractiveness factors as an alternative.
Interpreting the Matrix
The matrix can be partitioned into three segments representing a health indicator for any given product or SBU, the upper left segment (shown in green) reflects businesses that are strong relative to competition and in a market that is attractive. These businesses warrant resource allocation and should be developed to grow market share.
The middle segment (shown in orange) covers businesses that are question marks (see BCG Matrix). Products or SBUs in this region are either mediocre performers in mediocre markets, strong performers in unattractive markets, or weak performers in attractive markets. In any case, they require more evaluation to determine whether to invest and attempt to grow them or whether to divert resources or divest of them entirely.
The last segment represents the businesses that rate poorly both in competitive strength and market attractiveness. These should either be repositioned to exploit more attractive markets or their resources should be reevaluated to determine if they would be more effectively used elsewhere.
BRIEF HISTORY
In the late sixties and early seventies, while the Boston Consulting Group were devising the BCG or Growth Share matrix, General Electric, a leading corporation in the United States, were also looking at concepts and techniques for strategic planning. The firm was disappointed in the profits that they had made from their investments in the various businesses, which suggested flaws in GE’s approach

to investment decision-making. They became interested in the Growth-Share matrix and liked the visual approach depicting the positioning of a firm’s businesses on the matrix. General Electric, from all their own strategic planning research, objected to the two dimensional matrix which relied on market growth for industry attractiveness and relative market share for business strength.
McKinsey and Company
GE asked McKinsey and Company, a consulting company in the USA, to develop a portfolio approach with a wider dimension than the BCG matrix. In 1971 McKinsey and Co developed the business screen for General Electric to differentiate the potential for future profit in each of the 43 strategic business units. This matrix is also known as the industry attractiveness – business strength matrix and the nine-box matrix.
Strategic Emphasis
This matrix was designed to overcome the shortfalls that companies were encountering with the BCG matrix and to fill the requirement to compare numerous and diverse businesses. The scope of application for this model extends from a corporate level to a business level incorporating the products making up the business.
Flexibility
The matrix can be described as a multifactor portfolio model and it has a greater flexibility compared to the BCG, in terms of the elements that can be included. The matrix allows a company to assess the fit between the organisational competencies and the business/product offerings. It also introduces the

forecasted positioning of businesses/products on the matrix facilitating the strategic planning process. The matrix has nine cells compared to the BCG four cells and the scores on the axis can be rated low, medium, high compared to the BCG high and low.
THE APPROACH
This model suggests that the long run profitability of each unit is influenced by the unit’s business strength and that the ability and incentive of a firm to maintain or improve its position in a market depends on the industry attractiveness.
Factors that Affect Industry Attractiveness
Whilst any assessment of Industry attractiveness is necessarily subjective, there are several factors which can help determine attractiveness. These are listed below: Industry growth differentiate products and services

Factors that Affect Business Strength Relative cost position
Who Defines the Factors?
The factors are usually identified by a representative, experienced group of managers from the firm including corporate, business and functional managers.
An explicit understanding of what constitutes a potentially profitable environment is essential to the formulation of strategy and for the understanding of the potential impact of competitors.
A market or industry is considered to be attractive if its potential for providing a significant contribution to objectives for earnings growth and return on investment is judged to be high.
Examples of Industry Attractiveness Factors
Different strategists and consultants have devised different sets of variables for industry or market attractiveness indicating that there is no consensus regarding the factors that make up industry attractiveness but the final factor selection is a subjective evaluation conducted by the firm.

Not all of the factors have equal attractiveness to every company. They must be weighted accordingly to determine how much each factor contributes to the attractiveness of the industry to which the business belongs.
The criteria or factors must be consistent for all the industries that the firm competes in so that comparisons between the various strategic businesses can be made.
This approach considers not only the objective factors such as sales, profit, ROI for example but also gives weight to the subjectively estimated factors such as volatility of market share, technology, employee loyalty, competitive stance and social need.
The GE-McKinsey model can be likened to the more generalised and well-known SWOT (strengths, weaknesses, opportunities, threats) analysis as it allows the addition of both internal and external factors in the matrix construction. The competitive position or business strength represent the internal

capabilities which are controllable by the company while the external factors which are not controlled by the company (opportunities and threats) make up the industry attractiveness.
Value of the Model
This portfolio model also allows the business/product to be analysed in terms of dimensions of value to the organisation (Industry Attractiveness) and dimensions of value to the customer (Relative Business Strength). The GE McKinsey or Attractiveness- Strength matrix is important primarily for assigning priorities for investment in the various businesses of the firm, it is a guide for resource allocation and does not deal with cash flow balance, as does the BCG.
1.The three cells at the top left hand side of the matrix are the most attractive in which to operate and require a policy of investment for growth – these are usually coloured green.

2. The three cells running diagonally from left to right have a medium attractiveness, are coloured yellow and the management of businesses within this category should be more cautious and with a greater emphasis being placed on selective investment and earning retention.
3. The three cells at the bottom right hand side are the least attractive, therefore coloured red and management should follow a policy of harvesting and / or divesting unless the relative strengths can be improved.
Channon and McCosh devised a set of generic investment strategies for the GE McKinsey matrix as labelled in the previous diagram. A. T. Kearney also put forward guidelines for strategies in the different boxes and where these have not been incorporated they are mentioned below. (ATK = A.T. Kearny)
Grow / Penetrate –
These businesses are a target for investment, they have strong business strengths, are in attractive markets and they should therefore have high returns on investment and competitive advantage. They should receive financial and managerial support to maintain their strong position and to continue contributing to long-term profitability.
ATK – Seek dominance
Grow
Maximizes investment Invest for Growth –
Businesses here are in very attractive industries but have average business strength. They should be invested in to improve their long-term competitive position.
ATK – Evaluate potential for leadership via segmentation

Identify weaknesses
Build strengths Selective Investment or Divestment –
These businesses are in very attractive markets but their business strength is weak. Investment must be aimed at improving the business strengths. These businesses will probably have to be funded by other businesses in the group as they are not self-funding. Only businesses that can improve their strengths should be retained – if not they should be divested.
ATK – Specialise
Seek niches
Consider acquisitions Selective Harvest or Investment –
Businesses in this box have good business strength in an industry that is losing its attractiveness. They should be supported if necessary but they may be self-supporting in cash flow terms. Selective harvesting is an option to extract cash flow but this should be done with caution so as not to run down the business prematurely.
ATK – Identify growth segments
Invest strongly
Maintain position elsewhere Segment and Selective Investment –
Businesses with average business strengths and in average industries can improve their positions by creative segmentation to create profitable segments and by selective investment to support the segmentation strategy. The business needs to create superior returns by concentrating on building segment barriers to differentiate themselves.
ATK – Identify growth segments

Specialise
Invest selectively Controlled Exit or Harvest –
Businesses with weak business strengths in moderately attractive industries are candidates for a controlled exit or divestment. Attempts to gain market share by increasing business strengths could prove to be very expensive and must be done with caution
ATK – Specialise
Seek niches
Consider exit Harvest for Cash Generation –
Strong businesses in unattractive markets should be net cash generators and could provide funds for use throughout the rest of the portfolio. Investment should be aimed at keeping these businesses in a dominant position of strength but over investment can be disastrous especially in a mature market. Be aware of competitors trying to revitalise mature industries
ATK – Maintain overall position
Seek cash flow
Invest at maintenance level Controlled Harvest –
They have average business strengths in an unattractive market and the strategy should be to harvest the business in a controlled way to prevent a defeat or the business could be used to upset a competitor.
ATK – Minimise investment
Position to divest

Rapid Exit or Attack Business –
These businesses have neither strengths nor an attractive industry and should be exited. Investments made should only be done to fund the exit.
ATK – Trust leaders statesmanship
Go after competitors cash generators
Time exit and divest
Market Attractiveness-Competitive-Position Portfolio Classification and Strategies
APPLICATIONS OF GE NINE CELL MATRIX units or if a business unit is made up of a number of different product lines. General Electric used this matrix at five different levels in the organisation: product, product line, market segment, SBU, business sector.

businesses of the firm and is guidance for resource allocation. (Hax & Majluf 1983) Investment is assigned according to the generic strategies laid out above but generally is given to businesses who show strength in an attractive market.
businesses making up the firm can be analysed on the matrix, at the business unit level, the products making up the business’s portfolio can be mapped out onto the matrix.
ent and forecasting the future positions by assessing the factors constituting the business strengths. It allows an organisation to focus on the strengths and weaknesses of the business units or products.
Model weaknesses
-scientific’ approach referring to the method of weighting the factors before assessing them. Some critics ascertain that the factors of business strength and some of the industry attractiveness factors cannot be measured.
matrix will be consistent in terms of the criteria. Some firms develop standard lists of internal and external factors but each business/product is different and factors will vary accordingly.
assessing the relevant factors

Composite dimension matrices such as this one may mask important differences among products. (E.g. If business strength is made up of two factors weighted similarly, one product may be assessed as very low on the one factor and very high on the other one. Another product may score vice versa but both will be positioned on the same spot on the business strength axis.)
criticized in the past but the more complex GE matrix has also been accused of being too complicated and taking too long to complete.
matrix pays too little attention to the business environment GE/McKinsey.
Advantages –
1) It used 9 cells instead of 4 cells of BCG
2) It considers many variables and does not lead to simplistic conclusions
3) High/medium/low and strong/average/low classification enables a finer distinction among business portfolio
4) It uses multiple factors to assess industry attractiveness and business strength, which allow users to select criteria appropriate to their situation
Limitations –
1) It can get quite complicated and cumbersome with the increase in businesses
2) Though industry attractiveness and business strength appear to be objective, they are in reality subjective judgments’ that may vary from one person to another

3) It cannot effectively depict the position of new business units in developing industry
4) It only provides broad strategic prescriptions rather than specifics of business policy.
Advantages Over BCG Matrix
The McKinsey/GE version holds several advantages over the classic BCG Matrix. The market attractiveness measure is much broader and encompasses more factors than the narrower market growth rate measure of the BCG matrix. Likewise, the competitive strength measure replaces the more basic market share of the BCG and accounts for more factors than solely a product’s ownership of the market.

CASE STUDY - STARBUCKS COFFEE COMPANY
Executive Summary
Starbucks Coffee Company, founded in 1971 is headquartered in Seattle, WA and operates in 37 countries around the world. The backbone of Starbuck’s business is its company-operated retail stores. Starbucks has employed a strong differentiation strategy in order to turn a traditional $.50 commodity into a $4 experience. This following report provides an analysis of the strategies used by Starbucks to stay on top of its growing and volatile industry.
Starbucks’ governing principles are based on three strategic stances: the third place experience, creating a human connection, and providing a quality everyday experience for customers.
The specific strategies used by Starbucks include:
• Horizontal Integration: acquisitions of Seattle’s Best, Torrefazione Italia and Coffee People
• Market Penetration: differentiation and product placement outside of retail stores
• Market Development: educating the consumer about specialty coffee
• Concentric Diversification: release of bottled drinks, Ice Creams, and Liqueur

• Conglomerate Diversification: expansion into music and movies
• Value Chain Development: the human connection gained by business ecosystem maintenance
The overall level of competitive threat in the coffeehouse industry is moderate. This is due primarily to the moderate threat of green coffee supply and the moderate to high threat of competitors. These two threats carry more weight than the lower threats of buyers, substitutes, and new entrants. Competition is traditionally considered to be other specialty coffeehouses. However, when one considers other fast food retailers serving coffee, such as McDonald’s, the threat of rivalry intensifies.
Many opportunities exist for Starbucks in this industry. The premium coffee market continues to grow, offering opportunities such as rural U.S. expansion and continued international proliferation. The firm may also be able to create new distribution channels for other products as it has done with music, DVD’s, and books. Premium and proprietary food offerings can be used to drive growth in order to compete with fast food restaurants, and acquisitions and joint venture/licensing agreements provide additional possibilities for brand leverage. The Starbucks brand is very strong, but more steps can be taken to ensure that it becomes an enduring global brand.
Strengths of the firm lie in its tremendous brand image and loyalty, innovative business strategy, and strong financial performance over the long-term. Weaknesses lie in Starbucks’ heavy reliance on the U.S. market for sales, its image as an enormous, dominating corporation, possible overcrowding and storefront cannibalism, and the price sensitivity of other nations. This report provides a VRIO analysis based on Starbucks’ value chain, which indicates that the firm has core competencies in the areas of human resource management, marketing, and operating retail locations. Based on the analysis provided in this report we maintain that Starbucks is a strong company that is well

positioned for steady growth. We are recommending the firm as a buy with a long-term focus on returns.
OVERVIEW OF THE ORGANIZATION
Starbucks Coffee Company was founded in 1971, opening its first location in Seattle’s Pike Place Market. It was named after the first mate in ’s Moby Dick, is the world’s leading retailer, roaster and brand of specialty coffee with coffeehouses in North America, Europe, Middle East, Latin America and the Pacific Rim. Worldwide, approximately 35 million customers visit a Starbucks coffeehouse each week.
Starbucks is all about purchases and roasts high-quality whole bean coffees and sells them along with fresh, rich-brewed, Italian style espresso beverages, a variety of pastries and confections, and coffee- related accessories and equipment – primarily through its company-operated retail stores. In addition to sales through their company operated retail stores, Starbucks sells whole bean coffees through a specialty sales group and supermarkets.
Furthermore, Starbucks produces and sells bottled Frappuccino coffee drink and a line of premium ice creams through its joint venture partnerships and offers a line of innovative premium teas produced by its wholly owned subsidiary, Tazo Tea Company. The Company’s objective is to establish Starbucks as the most recognized and respected brand in the world.
In realizing and achieving this goal, the Company plans to continue to rapidly expand its retail operations, grow its specialty sales and other operations, and selectively pursue opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels.

INTRODUCTION
Starbucks Coffee Company, founded in 1971 as a humble coffee shop in Seattle’s Pike Place Market, has since grown into a dominant multinational corporation operating in 37 countries and serving over 40 million customers every week. At the end of fiscal 2005 Starbucks owned and operated nearly 5,700 coffeehouses around the world and licensed an additional 3,200 locations, generating $780 million in profit on revenues of $6.4 billion. The firm has employed a multitude of well-focused strategies in order to capture the bulk of its growing market and remain on top of the competition.
The Starbucks mission and principles are encompassed by three major strategic stances: the third place experience, establishing a human connection, and providing quality everyday experiences. The third place experience is created by Starbucks’ unique ambience. Tom Barr, VP of Food for Starbucks said, “ambience is very hard to communicate. Usually if someone is asked why they love a particular store they would not say ambience as the first thing. Customers might say they don’t care about the ambience; that they just want their coffee fast. Ninety percent of people that walk into a store will never stop to read the paper or sit outside

with their dogs. But in the back of these customer’s minds there is something that says ‘I wish I could do these things and I’m glad that such a place exists.’ There is a subconscious signal that this is a good place to be. That is the power of the third place.”
Starbucks also strives to maintain a human connection through ecosystem management, sustainable practices, supplier networks maintenance, firm transparency, and innovation. Lastly, Starbucks’ customers aren’t united by demographics, but rather by a desire to seek quality everyday experience. Company-operated stores are the backbone of Starbucks’ business. This is where the third place experience is most prevalent. The goal of the retail stores is to offer a place outside of the home and office for customers to relax and gather. Last year Starbucks opened 735 new retail storefronts. Ten percent of Starbucks’ business is in licensing the brand to other locations (i.e. Fred Meyer). While employees at these licensed stores are required to follow Starbucks’ detailed operating procedures, they do not receive all of the benefits of a company-operated store employee. The firm also has licensing arrangements with Kraft Foods and SYSCO to market, distribute, and promote food items to grocery stores and warehouse clubs. Partnerships have emerged from these licensing arrangements. The famous Frappacino drinks are bottled and distributed through Pepsi Co., Starbucks ice cream products are made possible through a partnership with Dreyer’s Grand, and the new Starbucks coffee liqueur is made by Jim Beam Brands Co.
Other initiatives, representing less than 1% of Starbucks’ business include music, movies, and the Starbucks Duetto Visa credit card.

STRATEGY IN ACTION COMPETITIVE FORCES FOR STARBUCKS
BARRIERS TO ENTRY
There are few barriers to entry into this industry. There is nothing in the technology of coffee production which creates a significant obstacle to entering the industry, for example no significant economies of scale or scope. A small player can easily set up a coffee shop. The major entry problem is location. There are a limited number of locations in the centre of any town, easily accessible to potential customers, such as shoppers or businesspeople during the day and those attending entertainment venues during the evening. With the advent of the expresso cart, the importance of location is retained but access to suitable locations made much easier. The saturation of good locations by Starbucks is a deterrent, the company being

prepared to cannibalize existing stores, with an initial loss of as much as 30% of sales, on the assumption that the additional stores will expand total demand to compensate. Starbucks has a reputation for predatory rental behaviour, paying over the odds in rent for a good location. It might even rent or lease and keep a venue empty.
Although Starbucks spends as little as $30 million on advertising, or 1% of its revenues, its brand nameis an increasing factor in deterring entry, established by word of mouth and repeated visits.
EXISTENCE OF SUBSTITUTES
In its broadest sense, a substitute is anything offering the same experience. The sale of specialty coffee in grocery stores and its consumption at home is a substitute. In its narrow sense tea, juice, soft drinks, alcohol and other flavoured coffee and non-coffee related drinks are possible substitutes. Starbucks provides some of these. The Starbucks coffee experience is a package of attributes. The overall experience comprises the ambience of the venue, including decor and musical background, the acceptability of the clientele, predictability of the product, convenience and ease of payment and even the availability of Internet facilities. Starbucks innovates to cut transaction costs and speed up service, introducing automatic expresso machines in some stores and prepaid Starbucks cards. In its 60 Denver stores it is possible to prepay on the phone or the Starbucks Express website and have the coffee waiting on arrival at the store. Starbucks claims the largest Wi-Fi network in the world, a high-speed wireless Internet service to about 1,200 stores in North America and Europe, developed together with Mobile International and Hewlett-Packard. The coffee house works as an office where you can check your emails and download multimedia presentations. Starbucks

provides an initial 24 hours of free wireless broadband, backed up by a variety of monthly subscription plans. The aim is to fill the stores in the period between the breakfast and lunch rushes, and win the support of the generation just entering the workforce.
BARGAINING POWER OF SUPPLIERS
Because Starbucks purchases high-quality coffee, suppliers give priority to Starbucks and work closely with the company to ensure prompt delivery and good quality. During the last 13 years the price of coffee has plummeted, peaking at US$3.15 per pound, but now at an average price as low as US$45 cents. The grower receives far less, since the intermediaries take their cut. The first International Coffee Agreement was negotiated in 1962, a complicated set of quotas for more than 60 coffee-growing countries, designed to keep prices reasonably stable. This it managed to do for 25 years, despite endless renegotiation. In 1989 the USA withdrew its support; the agreement was suspended and the price began to fall. Before 1989 the price had hovered around the US$1.20 mark. Supply ran ahead of demand, with new producing areas such as Vietnam becoming significant. During the 1990s world production rose by 21%, demand by 10%. The typical coffee producer is small, although the purchase by cooperatives or middlemen, including exporters, increases somewhat the market power of suppliers. The cooperatives do not have the market clout of Starbucks, which could easily apply considerable pressure on producers, hardly necessary, given the level of coffee prices in world markets. To access a wide variety of coffees and hedge the risks to local supply, Starbucks buys 50% of its beans from Latin America, 35% from the Pacific rim and 15% from East Africa. Increasingly Starbucks blends the coffees. With a global reach and access to modern procurement techniques, Starbucks makes purchases to minimize cost.

BARGAINING POWER OF PURCHASERS
The typical customer purchases a cup of coffee at one of Starbucks’ retail outlets and has little bargaining power. Starbucks has agreements with retailers, wholesalers, restaurants and other service providers to carry Starbucks coffee. Starbucks sought out leaders in the various fields, including the airline United Airlines, supermarket chains Nordstrom and PriceCostco, using a special brand name Meridian, bookstore Barnes & Noble and a supplier of business services ARAMARK. Starbucks has worked to develop new products: with PepsiCo to develop the frappuccino, a milk-based cold coffee beverage in a bottle; with Red Hook Breweries to supply an ingredient for a stout; and with Dreyers’ Ice Cream to develop its own ice cream which it distributes through Dreyers’ grocery channels. These companies have many more resources than the usual Starbucks customer and can negotiate from a stronger position.
INTENSITY OF COMPETITION
In developed economies there is a ‘retailing war’ between coffee chains, and between the local retail outlets of such chains and individual coffee shops.Starbucks is the largest player. In the USA there is no nationwide competitor. McDonald’s McCafe outlets are expanding rapidly, but they have a downmarket image. The strategy of McDonald’s has changed, from simply capturing the passing trade through low price, to making the outlet a ‘destination’. In 1997 in North America when Starbucks was beginning to take off, there were 3,485 competitors, mostly one store establishments with no plans to expand. Starbucks’ main competitor in the specialty coffee area was Second Cup, a Canadian company, a franchiser,

traditionally mall-based but increasingly using stand-alone locations like Starbucks. The forces of competition are strong in this industry, so it is remarkable that Starbucks has established itself as such a dominant player.
THE STRATEGY OF STARBUCKS
The main strategy of Starbucks is to establish a reputation for high-quality coffee, in effect to brand the company so that it can set a premium price, one which offers the company a profit margin way above that normally made in such an industry.
There are various ways in which it seeks to do this. It does it by emphasizing the quality of the product. It roasts the beans itself and after much experimentation created a taste which is unique, or claimed to be unique. It also uses technology, in this case the oneway valve bags to retain the freshness of the beans for the maximum possible period of time. It has developed a mystique about coffee. Another method of emphasizing quality is stressing excellence in everything the company does or sells. The focus is not just on the product, the coffee. It is also on the nature of the coffee shops themselves and the enthusiasm and good attitude of staff. Any other products which Starbucks uses or sells, such as coffee-making machines, grinders, coffee filters, storage containers or just coffee mugs, must come up to the same high standards as the coffee. There are three main areas to be considered in discussing the strategy adopted: the treatment of employees, principally the influence of this on their motivation; the choice of location for the stores, since this is vital to the whole coffee-drinking package; and the image presented by the Starbucks name, both domestically and internationally, and the management of that image. All staff from CEO to baristas (bar people) are, in theory, regarded as partners, not employees. Even part-time staffs receive stock options, so-called

‘bean stock’. Starbucks baristas are paid slightly higher wages than is the norm in the food service industry. They are given health insurance, disability and life insurance, and a free pound of coffee each week. The baristas who serve the coffee are usually college or university students. They are carefully selected and receive a significant amount of training, a minimum of 24 hours, ensuring that they can answer any question asked about coffee which may be put to them. Even executive staffs have to work in a store for two weeks to gain customer experience. Starbucks has aimed to have a very flat organizational structure, partly in order to ensure close contact between management at headquarters and the operational staff actually selling the coffee. It is unclear how Starbucks can maintain the initial culture of the staff, the high level of motivation and enthusiasm which marked the early years. Since venue is critical, the policy on location is an important part of strategy. Starbucks is happy to establish stores in close vicinity with each other, provided the location is good. One joke popular among staff stressed the close vicinity, by inventing a headline, ‘Starbucks establishes new store in rest room of existing store’. Starbucks has a team of property managers and others working to find the best sites for retail outlets. It needs to find such outlets at a rate of at least one a day in North America alone. The initial target was the main street of every major North American city, now it is the main street of all regional centres. Starbucks has turned to using espresso carts or kiosks, called Doppio espresso carts. It is in the process of branding the humble cart. An eight-foot by eight-foot cube unfolds into a large stand with a clear Starbucks identity which can be used for street corners, train stations and shopping malls. What is the population needed to support a coffee shop? This sets the threshold population size. In Seattle there is a store for every 9,400 people, the highest density anywhere. A more realistic target is said to be 55,000 in the USA and 56,000 in

Canada (the Coffee Specialty Association of America believes it could be half this figure, although almost half these would be coffee carts rather than stores). This would in theory mean that North America could support almost 5,000 specialty coffee retail outlets.
In 1997 Starbucks had just over 1,000 stores, or just over 20% of the maximum possible number. In the large urban markets, it had already reached almost one-third of the potential maximum. Rapid growth since then has moved the number much closer to the notional maximum. Today Starbucks has 4,247 shops, not far off a possible saturation point, although there are still eight states where there are none and Starbucks may not accept the rather conservative views of the various authorities, seeing Seattle as an indication of the potential. Essential to Starbucks is an integrated and efficient supply chain, whether it is supplying the retail store units, the specialty sales and wholesale channels, the mail order business, which is also important, or the grocery channel. The main growth vehicle is clearly the retail outlet, but the other channels help to boost the demand and establish the reputation. Starbucks only entered international markets when it had already established itself firmly in the USA. It therefore moved abroad from a position of strength. Its strategy was to seek good partners abroad. It chose to make its international entry in the Asia Pacific area, because of the enormous size of the market and its potential for growth. A higher population base is needed in many Asian countries in order to support one store but the population of Asia is so large that the number of stores could easily outnumber those in the USA within a short period of time. It chose to start in Japan in 1997. As Starbucks has moved to a point at which the North American market is saturated, overseas expansion has become critical to sustaining rapid growth. In 2002 a further 1,177 stores were opened, bringing the total to 6,000. In three years the aim is to have 10,000 stores worldwide. Starbucks is clearly expanding in dramatic style

internationally and at the breakneck pace at which it had already opened up the American market. The eventual goal is very ambitious, 20,000 stores worldwide. It has considerable room for further expansion. The problem is that the nature of the competition in other countries differs from that in the USA. The model adopted in Japan, in which the foreign expansion began, was very much the same as that used in North America, with one exceptional feature which related to the organizational structure. Starbucks set up a joint venture with a local retail partner, Sazaby Inc, which Starbucks then licensed to use the Starbucks model. Elsewhere in Asia, such as Thailand and South Korea, it initially issued a licence to a local operator, but later converted the local operator into either a partner in a joint venture or a wholly owned subsidiary. With licensing and the use of partners, there is always the problem of maintaining the quality of coffee product and store, and maintaining the brand image. The bigger the organization, the bigger the problem.
KEY SUCCESS FACTORS
Why is specialty coffee the basis for the success achieved by Starbucks?
There are a number of factors which have been important:
• There has been a switch in demand towards real coffee, and away from instant coffee, largely associated with the notion of real coffee as the superior product. There is also a tendency to replace low-quality coffee with higher quality coffees. This is partly a reflection of rising incomes and more informed consumers. Consumers have more discretionary income and the income elasticity of demand for specialty coffee rises with income. Consumers also know much more about coffee, which has developed something of the mystique of wine. It is now as socially valuable to know something about good coffee, as it is about good wine.

• The attempt to adopt a healthier lifestyle, particularly strong in the USA, and the campaign against drink driving, everywhere in the advanced world, has pushed consumers towards the consumption of non-alcoholic beverages. Coffee is an attractive alternative.
• After an initial emphasis on home entertainment, with videos and pay television, there is a return to regular ‘going out’ in developed countries, as shown by the revived popularity of cinema going. The coffee bars is a place where people ‘going out’ can easily meet and talk. It has also long been a locus of business activity for independent consultants, creative people and teleworkers’, but is also becoming a job search centre for the professional unemployed.
• Specialty coffee is an affordable luxury or aspirational good. Drinking Starbucks coffee conjures up the image of relaxed affluence (Fowler, 2003). It is part of what has been called a ‘democratization of luxury’. The neologisms ‘masstige’ or ‘boutiqeing’ have been coined to capture the combination of both mass market and prestige which attaches to the products which qualify as aspirational. Middle-market consumers selectively trade up to higher levels of quality, taste and aspiration. This involves the creation of the perception of luxury in goods and services that are hardly luxurious. Starbucks is in good company with the ‘super housewife’ Martha Stewart or designer pet food.
CHANGE STRATEGY – MCKINSEY’S MODEL:
The strategy employed by Starbucks could be analysed using the McKinsey Framework (McKinsey Quarterly, 2008).
The Experience:

Starbucks implemented the concept of the ‘third place’ to perfection around the world, with amenities such as free wi-fi and music being the order of the day, with a focus on making the place inviting and comfortable. As Ray Oldenberg, the original protagonist of the concept of the third place, agrees (Orsini, 2011), it is about the place where people come in just for the experience of it, not necessarily to buy stuff.
Product improvement:
Starbucks made its coffee stronger in England and Ireland in specific products – lattes, cappuccinos, mochas and caramel macchiatos.
Expansion:
After closing down five stores in 2009, the company is expanding with licensing arrangements in the market, with 26 stores now, as against 22 last year (Irish Times, 2012). The company plans to fuel its expansion by opening own stores rather than go about the licensing route.
Systems:
In an effort to pep up its brand value, Starbucks got into the Social media business, promoting its brands through channels such as Facebook, Twitter and YouTube. And its efforts haven’t gone in vain, with Starbucks appearing second among the top 100 social media brands, as per the ranking and report compiled by Brandwatch, the social media monitoring service and publicised in Social Brands 100 (2012).
Shared Values:

The company focuses on creating an experience that is equivalent to the ‘third place’, where people would find it convenient, comfortable and inviting to get to the premises for the sake of the experience; a third place apart from home and work for people to hang around. Sustainable Sourcing was another initiative that was taken to quell the voice of opposition around the world, accusing Starbucks of exploiting third-world farmers through unethical supply chain practices. In one fell swoop, the company decided to “actively cultivate and reward environmentally and socially responsible suppliers”, with the whole idea behind the initiative being all about forming a new paradigm in forging supply chain relationships, which could lead to mending the company’s global branding and drive the company’s growth around the world. Finally, Starbucks found a way to give it back to the community and has made it a wise business decision as well – the company has recruited a good number of veterans and has formed what is called the “Starbucks Armed Forces Network” (Scott, 2012).
Structure:
The structure in Starbucks is that of a matrix organisation, where the reporting structures highlight a long hierarchy with a top-down command flow. Further, there is much emphasis on compliance to organisational standards from individual retailer units as well as from the licensed partners.
RESULTS OF CHANGE STRATEGY
The results of the changed strategy was there to be seen in terms of improved sales, larger geographical reach, enhanced brand image, improved supply chain relationships and better products.

Starbucks hit profits in Ireland to the tune of €490,000 in the year to October 2011, as against a loss of €3.3 million the previous year, according to Irish Times (2012). While the company’s turnover actually fell from €16.2 million to €15.4 million from the previous year’s figures, the profits have come from improved margins on account of cost cutting and curtailing of administrative expenses.
The company was on a global expansion spree with a keen eye on China, predicting that China would be its second largest market around the world by 2014, the key to its global expansion (Business & Leadership, 2012).
The initiatives taken by the company in engaging the veteran community for employment, when unemployment rates among the veterans have been much higher than that of the civilian population, has borne fruits in the form of the company being among the select few to have been invited for the Social Innovation Summit 2012 (Scott, 2012), to “analyze innovative approaches and build lasting partnerships . . . to affect positive change” (Social Innovation, 2012). This has resulted in enhanced goodwill in terms of being socially responsible and in being a good corporate citizen.
Internal metrics had improved to show higher levels customer satisfaction, such as employee friendliness, beverage taste and speed of service (Businessweek, 2009), which are key ingredients towards the success of the brand.
However, despite the improved results, there is not much that would suggest that Starbucks has succeeded in its quest for market leadership. Market expansion, improved product quality, increased sales and display of social responsibility may be alright, but there may be more that needs to be done in terms of change strategy, considering the industry that

Starbucks is in, the kind of competitive forces at play and the brand that Starbucks would ideally want to build.
RECOMMENDED STRATEGY:
Innovation:
When it is a market that has scope for differentiation rather than one that involves price wares, the change strategy should focus more on innovation than on expansion. Management innovation, according to Michelman (2007), “is anything that substantially alters the way in which the work of management is carried out, or significantly modifies customary organisational forms, and, by doing so, advances organisational goals.”
With a focus on innovation, there should be little demarcation as in the case of departments, given that innovation is powered by cross-functional teams – innovations that could bring about lasting change in the organisation and are capable of effecting new business models (Maddock and Viton, 2009). As the authors claim, “What some companies call departments and partners are too often emblems of inefficiency”.
This could be contrasted with the organisational structure of Starbucks. Being a multinational firm and one that is brand conscious, Starbucks operates through its own stores or through licensed stores – and every one of these stores have to strictly adhere to the standards set by the corporate office at Seattle. Though Starbucks has taken initiatives at structural changes, they have more to do with managing the behemoth poised towards a global strategy

(Yahoo, 2012), realigning the retail businesses into three regional groupings, it may not mean much in terms of innovation.
Further, innovation has to be “outside-in” (Maddock and Viton, 2009). That is, it would be harder for someone inside the organisation to be outstandingly innovative, when people in the organisation have got so used to the systems, processes and culture of the organisation. The idea is to stress on learning instead on complying. There have to be questions and challenges to the status quo so that new ideas are borne out of thinking and innovation. A culture of compliance would only go against the principles of innovation.
The problem with the current strategy is that it stresses on global expansion through an organisational structure that emphasizes on compliance. The hierarchy in Starbucks flows from top to bottom in ways that authority is delegated and flows downwards, which is only to be expected as the normal way of doing things in an organisation so large and still expanding.
However, expansion should not be at the cost of innovation. It would be déjà vu for Starbucks, when the organisation expanded ruthlessly, only to realize that margins were shrinking and costs were burgeoning, resulting in a rollback of the expansion drive, ending up in urgent cost-cutting measures, closing stores and getting back to focusing on the basics. There are such warning signs already down the horizon – some of the principle driving forces of the Starbucks machinery, such as the ‘third place’ ideology, may be compromised in an overzealous urge to expand and establish in a global market, as is being perceived of Starbucks in Pakistan. Its reported emphasize on ‘traffic management’ by substituting spacious sofas with narrower chairs and bringing in subtle changes to the ambience may send mixed signals to the avid observer, pitting its image against its own brand (Khalid, 2012).

Organisation Transformation and Leadership:
There are two sets of factors involved in organisational transformation – Explicit factors that include Leader’s action, organisation strategies and organisation structures, and implicit factors, which would be organisation values, organisation culture and organisation member spirituality (Min and Santhapparaj, P. 216); and leader’s action proves to be the most significant factor involved in organisational transformation (Min and Santhapparaj, P. 215). While organisational change has to start with the leadership, the influence of the leader is at its weakest point in the initial period after the leader has taken charge, since it takes time for the leader to build credibility in the organisation, a key factor involved in influencing followers (Min and Santhapparaj, P. 220)
The only way that Starbucks could stay ahead of the pack and take the lead in the business is by focussing on innovation and resting the responsibility of change on leadership. While innovation in the organisation could be brought about by decimating departments and differences within the organisation, it would not serve the purpose if the organisational hierarchy remained what it is and leadership did not infuse fresh energy into the business, promoting an environment of change rather than compliance. The organisational hierarchy has to be a flat one that is capable of communicating the organisational goals and values across to the workforce.
If innovation is finalised upon as the key to success, there are three key principles to the art of organisational change, as suggested by Johnson (2000). The reasons why change is necessary should be clarified beyond any doubt and in a compelling fashion, people should

be well informed of the need for change, and the change has to be measured and rewarded adequately.
Branding and Positioning:
The increased emphasis on opening of a number of stores around the world is a clear sign that the organisation is in a hurry in its path towards accelerated growth. However, as has been discussed in the initial session of Industry Analysis using the Five Forces Model, speciality coffee is not an industry that is highly price elastic; nor is speciality coffee an industry that would fight it out in the market through price wars. With people being price insensitive when it comes to the ‘experience’ rather than the ‘commodity’, with entry barriers in the speciality coffee industry being high, unlike any other coffee vendor who would sell a product and not the experience, and with competition being hot on the tails, it takes a strategy with a difference rather than one that takes competition head-on, to succeed in the market.
While innovation could lead to any solution in terms of product, price, place, distribution and supply chain management, branding should reflect the core emphasis on innovation. An organisation that focuses on the experience seems to be taking a mass market approach that would be befitting to a commodity manufacturer. Rather, expansion should be compromised for the sake of value addition, and efforts should be on to construct entry barriers that would bar competition and new entrants from entering into the market. There is a risk of Starbucks catering to the generic sector in its quest for market share, one that has to be checked and the right product positioning, pursued.

CONCLUSION:
The efforts taken by Starbucks at strategic change are welcome in the light of the problems that the company had run into, and with reference to the issues caused by the economic slowdown in an era of increased competition. However, the changes may have been good enough to address the contingencies, but may not go long enough to steer the organisation in the right track over the long term. The ideal strategy for Starbucks would not be to rack up the volumes and grab market share, but would be to differentiate its product offerings in the market through innovation and by carefully selecting its target market, positioning its product offerings and enhancing its brand image. For this, the company would have to go in for structural change, foster a culture of change and innovation, and create entry barriers in the industry to keep competitors at bay through careful branding and market positioning.

REFERENCE/ BIBLIOGRAPHY http://tutor2u.net/business/strategy/ge_matrix.htm http://www.valuebasedmanagement.net/methods_ge_mckinsey.html http://www.quickmba.com/strategy/matrix/ge-mckinsey/ http://www.mrdashboard.com/GE_Matrix.html http://www.12manage.com/ http://www.kevinlanekeller.nl/ www.starbucks.com SEARCH ENGINE: https://www.google.co.in/

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