Organisational Strategy & Decision Making – Starbucks

Keywords: Strategic Analysis, Macro and Micro Environment, PESTLE Analysis, Porter Fives, SWOT, Strategic management assignment writing services

Introduction

The aim of this report is to analyse strategic issues faced by the Starbucks. The detailed analysis includes internal and external factors impact on company, environment impact evaluation using PESTLE analysis as well as the application of porter five forces.

The structure of report as follows. In the first section, it includes the introduction of the company and strategic issues faced. Moreover, relevant strategic management theories and tools will be used to evaluate these issues. At last, not least, in the light of these analyses conclusion and recommendations are provided.

Starbucks – Company Overview

Starbucks was established 1971 in Seattle offering premier roasted coffee beans as well as projected its image as speciality coffee house. Starbucks is one of the largest coffeehouse in the world with more than 21000 stores and has presence in 66 countries, as of January 2015. Company’s mission statement is ‘to inspire and nurture the human spirit – one person, one cup, and one neighbourhood at a time’.

Starbucks pursue differentiation strategy through providing high-quality coffee along with unmatched customer experience. The company have a wide range of product mix based on aroma, flavour and taste. Nevertheless, in UK, company have annual revenues of 21.4 billion, gross profitability of 15% and expected a growth of 6% in coming years (starbucks, 2015).

Strategic issue faced by Starbucks

Capon (2008) analysed that there are wide range of issues faced by the Starbucks is over-saturation in the US market, concentration of revenues from the developed market, dealing with newly emerging competitors such as Dunkin Donuts and Macdonald’s, fluctuating pricing of commodities, international expansion strategy and talent acquisition represent major challenges for the company. The challenges of dealing with competitors such as costa coffee, as well as Café Nero, have important implication in terms of profitability and market share.

Another strategic issue is pricing of the product as company purchase high-quality beans and competitors have cost advantage over Starbucks (Henry, 2015). The expansion strategy has also created numerous supply chain and cultural issues for the company. The expansion strategy has changed company focus from quality, brand and product offering to location and output.

Another important element to examine is the expansion policy as the company does not offer franchise which has made it difficult for the company it terms of resources required to maintain expansion strategy (Wheelen et al., 2016).

Strategic Analysis of Starbucks

Macro Environment — PESTLE Analysis

The PESTLE is acronyms for political, economic, social, technological, legal and environment analysis.

Political Factors

The political analysis includes range of factors such as taxation, trade and tariffs, licencing and permit issue, rules and regulation as well as political stability. The company have a range of issues such as taxation matter along with the policy of the government to support he local farmers. Therefore, the company needs to address taxation, as well as fair-trade policy (Wit and Meyer, 2015).

Economic Issues

Huczynski and Buchanan (2016) explained that the economic issues include recession, exchange rates, disposable income, interest rate as well as disposable income. The company is expected a growth rate of 6%, i.e. growth would not be an issue. Moreover, interest and exchange stability helped the company to predict the cost of its imports as well as low-interest rate mean low cost to service the debts.

Social Factors

The social factors include consumer taste and preferences, cultural factors, lifestyle as well as the level of education. People have high disposable income and working population preferably a morning cup of coffee. The company have outlets on all stations and platforms as well as a market which helps them to target working population (Greiner, Bohmann and Krcmar, 2016).

Technology factors

Dransfield (2016) stated that the technological factors include emerging new technologies, processes, as well as IT development.  The company have effectively deployed technologies to serve customer quickly. The company have effective systems to analyse customer data and redesign it marketing strategies. The development of the mobile App is a key issue to concentrate in order to stay competitive in the market.

Environmental issues

Environment factors include rules and regulations, climate change, planning permissions as well as waste disposal issues. The company have the high level of disposable packaging waste along with planning permission to open new outlets. The company should selected biodegrade sources for its products as well as carefully manage the pressure groups (Dyson, 2014).

Legal issues

Rao, Rao and Sivaramakrishna (2015) stated that the factors include health and safety regulations, consumer protection and employment laws. It is important company should follow and comply with these laws and regulations. Furthermore, maintaining health and safety and minimum wage act is most important element for company to compliance and regulations.

Porter Five Forces

Porter five forces analysis is used to analyse industry environment in order to develop an effective strategy based on the parameters and factor present in the market. In addition, application of the porter five forces to analyse the competitive environment will help to analyse current industry environment and develop a strategy to be successful in the market (Grundy, 2014).

Porter Five forces

Rivalry in the industry [High to Moderate]

The industry rivalry analysis is important while examining the macro-environment. The monopolistic position of the Starbucks along with large market share has helped to dominate position in the market. However, recent changes in the market landscape because of ‘Dunkin doughnuts’ and breakfast offering by ‘McDonalds’ has increased the competition for the company.

However, the most important and differentiated factors in the consumption of coffee involve quality and taste of coffee. The differentiated approach of Starbucks along with expertise in coffee brewing and serving has made it difficult for other players to intensify the completion for the company (Capon, 2014).

Bargaining power of supplier [Low]

Leea, Kimb and Parkc (2015) analysed that the supplier could either increase the price of the raw material or affects the quality of the supplies. Nevertheless, there is no alternative to high-quality coffee beans, but still suppliers have little bargaining power. The fair-trade programme, vertical forward integration as well as the size of the company has made it difficult for the supplier to pose high power.

Bargaining power of buyers [Moderate]

The cup of coffee is purchased by large number of individuals throughout the UK and, therefore, it is difficult for the individual user to demand a single price discount. The diverse customer base and these purchase relatively small volume of the coffee has resulted in little or no power for the customer. Moreover, there is hardly any switching cost associated with coffee and quality product at lower price helps the presented little competition for the company (Wheelen et al., 2014).

Threat of substitute [High]

Greiner, Böhmann and Krcmar (2015) studied that there is a wide range of offering by competitors such as fruit juice, soda and energy drinks and especially in the summer season. There is no switching cost or the customer and customer can buy alternative products at lower price. However, Starbucks counter these offering through quality product offering but it affects the profit margin of the company.

Threat of New entrant [Moderate]

Nevertheless, market giant like Starbucks have an advantage in terms of real estate and brand image create moderate barrier to entry for small firms. Moreover, there is little entry cost in the industry which results in strong local competition. The prominent threat for the Starbucks is presented by the fast food chain McDonalds and Dunkin Donuts which could represent significant challenges for the company (Huczynski and Buchanan, 2015).

Internal analysis — SWOT Analysis

SWOT stands for Strengths, weaknesses, opportunities and threats as depicts in the diagram below

SWOT analysis

Strength

The strength of the company includes high-quality products and diverse product mix. The high-quality product has helped to avoid standardization of the product as well as a wide range of products helps to cater the need of a wide range of groups. Moreover, wide range of factors such as location of company outlets (high visibility and premium location), social responsibility initiatives along with use of mobile technology has helped the company to maintain competitive advantage in the market (Valentin, 2015).

Furthermore, Starbucks have a strong reputation for employee management specialty knowledge and skills of its employee. Employees are offered a range of incentives such as stock options and a wide range of training (Wit and Meyer, 2015)

Weakness

Hill and Jones (2016) explained that Starbucks aggressive expansion strategy has resulted in overcrowding in the market. The company have a large portion of its revenue derived from US market which makes it heavy rely on US market. Moreover, recent expansion to the international market has resulted in a cultural clash for the company.

The prices of the company product are somewhat considered overpriced and special relation to emerging markets (BRIC). At last, not least, a large image of the company is a problem in itself. Recent issues like taxation practices, labour practices as well as environment issues have risen concerned for the company (Grundy, 2016).

External analysis

Opportunities

According to Dyson (2014), Starbucks has a wide range of opportunities such as an expansion to markets to reduce its reliance on the US market. The company can take advantage and leverage from its existing resources through making entry into developing markets. Moreover, the company have the opportunity to diverse its product offerings like fruit juices and smoothies as well as can formed joint ventures to reduce its cost of entry and operation.

This will help to tackle the cultural issues in the developing and emerging markets. Furthermore, it can take advantage from the new distribution channels and ordering system through mobile (Ebers and Wied, 2015).

Threats

The major threats to the company are increased competition from brands such as costa coffee, Dunkin Donuts and McDonalds represent major challenges for the company. Nevertheless, the market share of Dunkin Donuts stands at 23%. Moreover, most of the Starbucks revenues are from the developed market, i.e. it is important to diversify its revenue portfolio.

Another important factor is the price of commodities, which makes a direct impact on the profitability of the company. At last, not least, consumer changing preferences towards healthy lifestyle and diminishing coffee cultures represent a major threat to company (Akan et al., 2016).

Discussion and Evaluation of issues

Akan et al (2006) explained that the current strategy of the Starbucks is resource based view, it which company adopt the inside out approach and does not respond to the need of the customers. The company follow the same success principle from the US market and deploy them to emerging without localization of the strategy.

The company fails to address the principle of ‘think globally and act locally principle’. The changing competitive landscape of the coffee industry in terms of consumer, supplier and substitute represent major challenges for the company.

With the help of the porter five forces, structural characteristic of the coffee industry has been analysed. The changing monopolistic nature for the company, emerging new players as well as a cultural change to adapt to a healthier lifestyle has raised the concern for the company and get align to changing market variables (Wheelen et al., 2014).

The threat of new entrant is high because of the low cost of entry, as well as healthy and low-cost alternatives offered by the competitor required to dependable strategy. (Henry, 2011)

According to Michael Porter, Company can pursue three types of strategies such as cost leadership, differentiation and focus strategy. Cost leadership mean lowest cost producer in the industry, differentiation represent offering and creating value which perceived to unique. At last, not lease focus involves cost focus of differentiation focus with reference to segment, geographic or particular product.

The current strategy of the Starbucks shows differentiation focus strategy. A company out more focus on research and development rather spending a large amount on marketing and target based performance measures. The company have a competitive advantage in the mature market and it should continue to focus on the differentiation strategy because, in time of competition, it acts and shield against increasing price (Wit and Meyer, 2015).

Furthermore strategic analysis of Starbucks in the light of VRIN model (Value, Inimitable, Rare and Non-substitute). The value offered by the company for its coffee is unique and premium when compare to offering of competitors. This gives the company an opportunity to position itself as premium quality products in the market.

Starbucks chose it raw materials from the finest cocoa bean and offer the same product in its entire locations. This makes it product offering consistent and same flavour in its all store. The special taste and aroma of coffee makes it inimitable and successful for the Starbucks. At last, not least, coffee taste is highly non-substitute compare to offering of McDonalds or Dunkin Donuts (Ebers and Wied, 2015).

The SWOT analysis shows that the company should pursue it expansion strategy in the emerging and developing to reduce its dependency on the US market, as well as manage the issue of over concentration in the US market. This helps the company to create more sustainable competitive advantage.

The element of continuous improvement and quality product offering in the emerging markets is an effective tool to leverage the resources. Furthermore, the company should reinforce its image against the low-cost competitors. In addition, company should continue its strategy to develop strong knowledge base for its employee to offer high-quality services to its employees (Hill and Jones, 2015).

Conclusion and Recommendations

The company has failed to leverage from the opportunities and expertise in the emerging markets. The current expansion strategy of the company has increased the cost as well as it fails to take advantage of local market knowledge. The emerging competition in the market has resulted in changing and realignment of company resources and priorities.

The overcrowding in the US market and reliance on revenues from developed market has resulted in stagnant growth in the market. The company needs to take advantage of new market opportunities, but this require careful alignment and strategic alignment as the company has experience number of cultural and product problems.

The expansion model is high cost and company needs an alternative to effectively pursue the expansion strategy. At last, not least, company have experience strong competition in local market and it needs to balance and reinforce its differentiation strategy.

Starbucks should focus on the improvement of internal processes in order to develop a function which helps to share the information in terms of profitability, operational costs, as well as highlight customer experience. The strategy should be a focus on localization of the processes and menu in order to tackle the cultural and product experience issue.

The company should interact with customers through collecting feedback and respond to the customer. This will help to adopt outside in approach compare to current inside approach. Moreover, the company should introduce product and services according to the need of the local market.

Another important factor to consider is breakup traditional image of coffee culture and offers a variant of drinks for different age groups. In order to tackle the issuing company pursue a policy for product development to counter cultural and product issues in the international market.

Starbucks should decide to enter in the international through a mix of strategy through signing a memorandum of understanding (joint ventures and franchising) to reduce its expansion cost and adapt to the local environment.

At last, not least, deploying practices of the uniqueness of location as well as the quality of services will help the company to reflect international offering in the local market.

 

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