Research and Development — Starbucks

The goal of this report is two-folded. First, it analyses the external environment factor influence and their importance for the organisation. Second, it evaluates the importance of research and development (R&D) for Starbucks.

Moreover, the report appraises how R&D influences policies and decision-making of Starbucks influence the effectiveness of company response. Finally, it presents improvements for Starbucks response.

Introduction

Worthington and Britton (2015) stated that business does not operate in isolation and has to deal with the dynamic environment in which they operate. The business environment is known as conditions in which it operates and categorised as the internal and external environment. The external environment includes factors such as political situation, economic situation, technology and social attitudes over which business has little control. On the other hand, the internal environment includes product, location and resources.

Furthermore, globalisation and technology have changed the business operating environment and today businesses are faced with dynamic environment resulting in rapid and predictable changes. Businesses face competitive pressure and consumers showing complex behaviour in the US and international markets  (Tongur and Engwall, 2014).

Baxter (2015) explained that Research and development (R&D) is important element of economic and productivity growth as R&D investment reduce production cost through altering output characteristic and provide new product and services. R&D for firms is important source to improve productivity and achieve business growth through product innovation and new introduce processes.

Starbuck (SUBX.O)

Starbucks started its operations in 1971 and sell single-original premium coffee along with 30 blends. Starbucks purses aggressive acquisition strategy and in 2015, annual revenues of the company were $19.16 billion with net income of $2.76 billion. Company serve freshly-brewed beverages, Frappuccino and espresso, beverage, smoothies, tea and snack offerings such as sandwiches, breakfast and pastries.

The company mission is to inspire and nurture the human spirit through one cup, one person and one neighbourhood. In 2016, company has operations in 70 countries through it 24,000 stores. The company has received most ethical company in 2016 and key competitors are Tully Coffee, Peet’s Coffee, Costa Coffee and Dunkin Brand. The detailed profile of Starbucks is attached in appendices 1 (Starbucks, 2016).

Task 1 – Overview of primary external influences

PESTLE factors

Kim-Keung (2014) described that the external environment of business has a significant influence on policy and strategy. The identification of external factors within their environment is important for organisation to determine impact on their operations. Organisation has little or no control over these factors and important tool to identify external factors is PESTEL. The framework is useful to analyse political, economic, social, legal and technological issues as shown in the diagram.

PESTLE model

Political and legal factors

Rao, Rao and Sivaramakrishna (2015) defined that the political stability directly influences the operations of company. The political instability may result in disruption to operations and company has to exit the market. Moreover, despite the political stability, government may change the policies at high level which has serious implication for company. For example, government introduce new trade regulations or taxation.

Anton (2015) discussed that the government policies might affect organisation through employment law, consumer protection law, trade restriction, health and safety requirement and environment regulation. Moreover, political situation might affect foreign investment attitude in a country and legislation process. For instance, in food and beverage industry, possible implication includes compliance with food and drug administration regulation.

Economic factors

Cohn (2015) stated that the economic analysis involves assessing potential changes to the country economy such as taxes, inflation rate, exchange rates, interest rates and trade regulations. The impact of an economic factor on the operational efficiency of business through working practices, purchase power of customer, pricing and cost of business.

For example, an economy with rising inflation would adversely affect pricing and confidence of the consumer. The range of economic issues for organisation affects business such as taxation and tariffs affecting the profitability of business. Moreover, company entering international markets examines indicators such as Gross domestic product (GDP) and consumer confidence to assess profitability of target market (Baxter, 2015).

Social factors

Miller, Vandome and McBrewster (2015) highlighted that social factors affect need and potential size of market for goods and services of company. The influence of social factors affects product offering and sales of company. The factors include population growth, age distribution, income level, education and employment level. For example, cross-cultural communication and social factors have important implication in global markets to manage customers, employees and promotion matters.

For food and beverage industry, social factors define the taste and preferences of customer and cultural differences influence purchase intention. For example, in emerging market social interactions are different such as people prefer to socialise in groups and people purchase product for social status. The social factor importance for business includes cultural trends, religious belief and social conventions (Worthington and Britton, 2014).

Technological factors

Eva et al (2014) discussed Technological factors influence investment in innovation, make or buy decision, investment incentives and automation changes. The rapid pace of technological development affects business through unexpected sources. Technological factors affect organisation at two levels which are infrastructure and manufacturer. For example, improved production technologies enable to gain market and achieve competitive advantage.

The range of activities includes automation, improve product quality and significant cost saving. For example, the knowledge-based system enables the organisation to make a better decision and deliver quality service. Technology allows improving workflow and eliminating operational bottlenecks. The adoption of appropriate technology is important to develop sustainable competitive advantage (Gupta, 2016).

Environment factors

The environment concern has become important in recent times and particularly in global context organisation actions may result in unquantifiable financial implications. The range of climate challenges faced by business includes natural disasters and weather climates.  The implication of weather conditions impose uneconomic cost for business and create problems such as logistical problems (Jennifer and Hu, 2015).

Company before entering new market consider humidity and temperature which affect the taste of customer as well as influence the resource availability for company. Environment and ecological factors aspects have consequences at both social and economic level. For example, packaging and waste disposal requires additional measures for companies to minimise the environment impact (Eva et al., 2014).

Porter five forces

Porter (2013) elaborated that competitive position analysis framework to assess and evaluate position and competitive strength of business. The framework is based on five forces to determine attractiveness and competitive intensity of a market.

It allows the business to understand strength in current competitive position and future position that business can move into. Porter five forces enable to determine potential product profitability as well as identify strength, avoid mistakes and improve weaknesses (Roy, 2016).

Porter Five Forces

Bargaining power of Customers

Walder (2013) discussed that the bargaining power of customer enables the organisation to understand how customer can drive down the price. The factors which affect customer power include number of buyers in the market, importance of each buyer for organisation, switching cost and availability of alternative in the market. The factors which increase the bargaining power of customers are price sensitivity, switching cost, and little product differentiation and customer knowledge for product.

Bargaining power of Supplier

Supplier power involves an assessment that how the supplier can drive the price of material and affect the profitability of the company. The supplier power affects the company through a number of suppliers in the industry, relative size and strength of supplier, the uniqueness of product and service and switching cost from the supplier. The bargaining power of supplier is high when supplier product is undifferentiated; lack of substitution availability and buyer is not price sensitive (Magretta, 2015).

Threat of new entrant

Dufresne (2016) discussed that the profitable industry attracts new entrants which affect the profitability of company. Company tackle threat of new entrant through economies of scale and learning curve. Moreover, barriers to entry the industry such as capital requirement, patents or government policies may discourage new entrant to enter the market. The threat of new entrant is lower in there are barriers such as asset specificity, patent and proprietary knowledge and government policies to protect industries.

Threat of substitute

The threat of substitute highlights availability of substitute or alternative product in the market. It increases the chances that customer would switch to alternatives in case company increase price. The threat of substation affects the profitability of the company and reduces the attractiveness of market.

The threat of substitute is low when switching cost is high, substitute product quality is inferior or price is higher or there is no substitute is available. On the other hand, threat of substitute is higher when substitute product is cheaper and product is equal or better (Humphries and Gibbs, 2015).

Rivalry and competition

Autry et al (2015) added that the rivalry and competition in the markets is important driver to understand the capability of competitors in the market. The number of competitors offering undifferentiated products is likely to reduce the attractiveness of a market. For example, rivalry in the industry is determined by size and number of competitors, industry growth rate, product differentiation and exit barrier in the industry.

The intensity of rivalry increases with a number of firms, low switching cost, low product differentiation and high exit barrier. The common strategies to protect market share incudes improve quality and service, use distribution channel, product differentiation and alternative pricing policies (Collett Miles, 2013).

Task 2 – Research and Development and Starbuck

R&D division for Starbucks

According to Mary Wagner, the SVP of Global R&D and quality at Starbucks, company has dedicated team of 80 employees for food and beverages development. The collaborative process and cross-functional team works on product innovation. The decentralised structure of company enables the company to deliver to deliver products which are relevant to satisfy the US customer through Starbucks experience.

The purpose of R&D at Starbucks is to improve products, services as well as technologies which allow delivering new-to-world products for its US and international customers. The success factors in coffee industry are innovation and expansion. The product differentiation and strong brand equity has enable the Starbucks to exploit opportunities in US and international markets (Simmons, 2015).

Analysis of Starbucks policies and decision-making

According to Johnson, Scholes and Whittington (2014), strategy set the direction as well as scope of company over long-term horizons which enable the organisation to achieve competitive advantage in changing business environment through configuration of competencies and resources.

Starbucks business strategy is to explore new opportunities and introduce new product and processes to ensure growth and lower profitability. The research and development expenses for Starbucks were $ 25 million in 2015. Company spend on technical development of food and beverages, new process and expansion of business to international markets (Jang and Jung, 2014).

Rosemann and Brocke (2015) added that the external environment analysis is important part of organisation strategic planning process. The consolidation in mature market, high coffee cost, intensifying competition and reduce margin has forced company to look for the US and international opportunities. The focus is to develop and test new products and markets and process improvement in all areas of business.

Starbucks uses internal benchmarking approach in collaboration with Stage-Gate international which allows implementing best practices and achieve predicable innovative success (Qian and Xing, 2016).

Morris, Richardson and Allen (2015) stated that the analysis of environment changes enables the organisation to effectively allocate the resources and response to market changes. In the context of five forces, the key issue faced by Starbucks is to manage product innovation and create value. The bargaining power of supplier is high because natural ingredients (coffee beans) market is changing.  The bargaining power of customers based on low substitute affect the profitability potential.

Magretta (2012) argued that the biggest threat for coffee retailers is bargaining power of supplier for coffee beans. The increasing price of coffee affects the profitability of company. Starbucks R&D capabilities are based on technological innovation, new business model, new product and extensions and business process improvements.

Consequently, R&D helped to broaden its market scope through balance product and customer needs in US and international markets.

R&D value for Starbucks

Gouillart (2014) analysed that the product and service innovation is important factor for speciality coffee retailers such as Starbucks to exploit economic opportunities which are crucial for growth and profitability. In US market, R&D capabilities helped to develop new products such as real fruit juice and low calories beverages has proven a perfect solution for customers looking for natural energy and delicious refreshment.

In 2015, company introduced new store design for express store in New York as well as company formed partnership with Spotify to provide in store music play list for its customer. Moreover, company develop mobile order and pay solutions and integrated into Starbucks loyalty reward program (Cohn, 2015).

Miles (2013) highlighted that the company has diverse it revenues base through international expansion but large revenues come from the US. The company needs to diversify its product base and offer economic pricing for customers. In US markets, R&D of company has allowed tapping segment of natural energy solutions.

The company introduced product made from green extracts and free from caffeine to meet the need of health conscious customer. The R&D enables to develop new products and services which meet taste and preference of US customers (Torres et al., 2015).

Kososki (2014) asserts that the consumers in international markets are willing to pay premium for international brands because of status and quality inspires confidence. For example, Brazil rising economy is expected to make it biggest coffee drinking nation with expected growth rate of 39%. The economic growth of Brazil has made it important economy to invest as it expected to grow.

Thus, company introduced products and service which meet the needs and requirement of international customers to deliver Starbuck experience in Brazil. In global markets, Starbucks need to meet cultural interest and taste through offering innovative economic pricing and expand scope of operations.

For example, in India, emphasis on high quality standardized product is less likely to make customer pay $4 for a cup of coffee when compared with US tea/coffee retailers. R&D has enabled the company to introduced ‘Teavana speciality tea’ and ‘Himalayan Mineral water’ to respond to competitors (Lemus et al., 2015).

Effectiveness of Starbucks R&D

Strength of Starbucks

Jones, Forsythe and Kemp (2015) acknowledge that the strength of Starbucks is based on high brand equity, high brand awareness, loyal customer base and good relationship with suppliers. Starbucks has strong brand recognition and offers high-quality products. The three important success factors for Starbucks are responsiveness, integration and flexibility. To response to US competitors in the US, Starbucks used the new approach for food menu development. The company has introduced balanced portfolio of items based on smaller portions.

Dufresne (2016) commented that the offering such as Bistro Box and Petites lines has helped the company to meet the needs of different customers. Starbucks has divided its company based on need of different geographical region to meet the needs and desires of US region. The breaking down of global market in smaller region has offered more flexibility and responsiveness to wants and needs of customers. Starbuck actively and successfully uses technology to deliver unique experience through service such as mobile payment and in-store playlisting for customers (Wright and Simmons, 2015).

Michelli (2013) described that Starbucks used regionalizing and decentralisation approach for decision-making rather taking autocratic decisions. Starbucks has leveraged it strong brand name and develop new products in US and international markets using Starbucks name. Starbucks faces stiff competition in developing markets with high bargaining power of customers. Starbucks manage ‘MyStarbuckIdea.com’ to receive feedback directly from customer and development product and processes based on feedback.

Westerman, Bonnet and McAfee (2014) added that the development of new products and partners has allowed the company to develop product and services which meet the requirement of customers. The inclusion of variables such as culture and weather would allow the company the develop product which delivers Starbucks experience. The development of new state of art store as well as working on 277 ideas from customer shows company commitment to R&D.

The initial expansion of Starbucks was based on license format in which company sell coffee and related product to US license and received royalties from stores. However, this raised control issue for the company and changed its strategy for global expansion. The joint venture strategy to enter the foreign market has allowed the company to overcome cultural differences within each geographic region and company counts on employees for new ideas and customers (Lemus et al., 2015).

Berger and Blake (2016) discussed that the success of Starbucks is embedded on learning and innovation through cross-border knowledge management. Starbucks has expanded its operation into developing markets with own culture and practices. Starbucks strategy to form joint venture has helped to overcome difficulties in expanding aboard and deliver product according to need to local customers preferences.

Weakness of Starbucks

Ellis and Parsons (2013) recognised that the significant weakness of company in international context market is pricing strategy. The economic and social influences affect the policies and strategy of Starbucks in emerging markets. The increasing price of coffee has direct effect on company because its competitors largely focus on food then coffee (McDonalds or Dunkin Donuts).

The price of a cup of coffee for Starbucks is same in the US and China. Competitors offer coffee and alternatives at much lower in international countries. The economic characteristic of coffee industry is evaluated through cost of coffee which affects the profitability.

Harold (2015) claims that the price of coffee increased due to strong demand and it is expected to grow further. The product pricing is expensive when compared to competitors which erode profitability of company. There is lack of diversifying for business to introduce new products and services. In international market, R&D capabilities of Starbuck have failed to yield true potential of its brand particular in international markets.

Haskova (2015) comment that the legal and economic challenges in emerging markets is that Starbucks started its operation in India in joint venture with Tata because of US regulations prevent 100% ownership. The population in emerging markets are largely based on young individuals and they preferred to buy branded products. However, the hefty price tag in emerging markets is major challenge.

Moreover, the lack of unique proposition in emerging market where customer can get alternative at lower cost is challenges associated with Starbuck business strategy. For example, the failure to maintain kosher standards in Israel as well as failure in Australia is evident that Starbuck needs to invest time and resources to achieve success in international markets (Wong, 2014).

The expansion through joint venture in growing markets has raised control issue. Indian economy is based on consumer spending as economic growth has made upper and middle class to buy brand products. Starbucks had planned to open strong stores in India because of strong economic growth and government policies to attract foreign investment.

However, Indian food authority has banned number of Starbucks products because of standardised product approach. The R&D has started to work with local partners Tata to develop products which are suitable according to US culture and taste (Wright and Simmons, 2015).

Area of improvement Through R&D in US and international market

Starbuck brand and unique value proposition

Eva et al (2014) analysed that in past, the Starbucks has focused on the US market with no or little competition. However, entry of dominant player in US market required that company diversify its business. Competitors are offering ‘Premium coffee’ at lower prices and a cup of coffee from Costa Coffee, MacDonald’s or Dunkin Donut has same aroma, quality and flavour.

Starbuck needs to introduce new product such as organic coffee and food which ensure it maintains product differentiation. There is need for research and development (R&D) for new blends; flavours and fusion are opportunity for business to maintain its position as market leader for premium coffee (Appel, Shi and Emdad, 2016).

In international context, product differentiation required development of new products which fits the needs of customer from economic and social perspective. The inclusion of variables such as culture and weather would allow the company the develop product which delivers Starbucks experience. The development of new products which are cost efficient would allow the company to sold product at lower price (Jennifer and Hu, 2013).

Another potential opportunity exists for Starbuck is introduction of drive-through services. The R&D department would allow developing products and service which meet increase satisfaction of customers and lower the threat of substitute. This would allow the company to serve a large number of customers looking to make quick run for coffee. R&D team design and develop new processes which enable to implement new drive-thru service (Jennifer and Hu, 2013).

Expansion and growth

Company needs strong market information before entering the foreign market. The current policy is to develop partnership with local business. However, there is stronger need to fully understand the external environment influence. For example, the economic and social perspective effect on the sales and operations of company. This would allow tackling cultural and legal issues in the international markets.

The annual report of company highlights the commitment of company to sell coffee and related beverages only. Company has strict control on purchase, packaging and distribution of coffee (Jang and Jung, 2013).

Morris, Richardson and Allen (2015) evaluated that Company needs to diverse its product and customer base in US market to reach new segment of markets. In international market, there is huge potential for Starbucks to tap new market segments and reach billion of customers through developing product according to US taste and preference.

Research and development should focus on development of product which meets the lifestyle of young people particular in emerging markets. The introduction of Starbuck products with regional blend provides an opportunity to capture new segment and markets (Roberts and Gargov, 2015).

Conclusion

Starbucks has a strong brand name and it has managed the transition from domestic to an international company through offering global products. R&D is vital for business to response to external environment and adjusts business to its environment. However, in the international markets company has lost its market leader position and has lower market share.

The innovative capabilities of Starbucks have not delivered success through developing product and service according to need and preference of US customers. Starbucks needs to the emphasis on development of product and service which cater the need of US market customers.

The research and development (R&D) require for new blends, flavours and fusion is an opportunity for business to maintain its position as market leader for premium coffee. The company needs to broaden its market scope through balance product and customer needs.

There is strong need to diversify product and customer based through innovative product and solutions. For emerging market, it should develop new products which are cost efficient would allow the company to sold product at lower price.

 

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