Starbucks, a company established in 1971 and headquartered in Seattle, Washington, began as a local coffee bean roaster and retailer. It was co-founded by Gordon Bowker, Jerry Baldwin, and Zev Siegl. Since its inception, Starbucks has undergone remarkable growth. By 1987, the company had expanded to a total of 17 stores (Starbucks 2012). In that same year, Howard Schultz acquired the company and merged it with Giornale to form Starbucks Corporation. Currently, Starbucks operates globally with over 18,000 stores across all continents in more than 60 countries (Starbucks 2012).
Starbucks (2012) has established its reputation through a diverse and inventive product range, encompassing hot and cold beverages, coffee beans, salads, sandwiches, pastries, snacks, as well as mugs and tumblers. This essay will analyze Starbucks’ competitive strategies and evaluate how effectively it aligned these strategies with its goal of penetrating the US market.
Starbucks transformed from a mere coffee, tea, and treats provider to an essential part of customers’ daily routine. Furthermore, during the 1980s, people started becoming more brand conscious, prompting companies to adjust their approach. Consequently, Starbucks shifted from transactional marketing to relationship marketing, prioritizing customers’ opinions as a decisive factor in achieving market success (Kotler 1986:119).
Starbucks positioned themselves as a premium brand in the coffee industry through the presentation of innovative products, high standards, and excellent service (Gangadharan 2010). They implemented total quality management (TQM) by involving all employees in improving product quality (Kanji 1996:7). As a result of efficient training programs for staff, Starbucks successfully met customer expectations for value (Gangadharan 2010).
Later on, the company began developing and offering new products, demonstrating their commitment to maintaining their high standard and premium brand image. Typically, consumers use the price of a product as a gauge of its quality. Therefore, Starbucks was viewed as an expensive brand that delivered high quality products worth purchasing (Dalrymple and Parsons 1986:53). Brassington and Pettitt emphasize the importance of the interaction between personnel and customers (Brassington and Pettitt 2000:81).
For instance, Schultz recognized the significance of Baristas interacting with customers, thereby providing them with the unique ‘Starbucks experience’. Furthermore, promotion can be viewed as a marketing tactic that contributes to sales growth (Shimp 1997:42). Starbucks aimed to achieve a nationwide monopoly without resorting to advertisement. They relied on hosting events and promoting their brand through merchandise like mugs and T-shirts adorned with city-inspired artwork. ii. PORTER’S FIVE FORCES
According to Michael Porter, the competitive forces in every industry are determined by its underlying structure, which consists of fundamental economic and technical characteristics (Porter 1998:23). These forces include industry rivalry, threat of new entrants, threat of substitute products, bargaining power of suppliers, and bargaining power of buyers. Porter also emphasized that understanding these sources of competitive pressure is essential for developing a strategic agenda or taking appropriate action (Porter 1998:22).
Despite facing competition from Coffee People, Gloria Jean’s, and Second Cup, Starbucks has an advantage because of their smaller size and focused operations in specific regions. While these competitors are expanding or planning to expand globally or nationally, Starbucks continues to dominate the coffee industry. However, their monopoly is being challenged by new rivals such as McDonald’s, Burger King, and Dunkin’ Donuts.
Although entering the coffeehouse industry is not a challenging task, Starbucks has set demanding benchmarks that numerous businesses in this sector find difficult to achieve. The brand’s image and distinctive offerings play a crucial role in addressing the risk posed by alternative products. Coffeehouses go beyond just serving coffee; they also focus on creating an ambiance and aesthetic, much like what Starbucks offers. Consequently, substitute products are not considered to have a significant impact within this framework.
According to Porter’s analysis, the customers hold the most significant influence in the industry, which is supported by the case of Starbucks and the coffeehouse industry. The dominant purchasers in this industry are individual consumers, who are generally less sensitive to price (Larson 2008:101). Consequently, their bargaining power diminishes. Similarly, suppliers’ bargaining power is weakened by the multitude of coffee farms worldwide (Larson 2008:101).
There is a high number of suppliers in the market, including influential players like Starbucks. These suppliers have bigger profits, which reduces their bargaining power. SWOT analysis is a tool used by companies to identify their strengths, weaknesses, external opportunities, and threats in a specific market segment. This analysis helps companies understand their strategic position and make changes to their strategies (Management Study Guide 2012).
Starbucks’ main strength lies in its flawless brand image and reputation. Despite selling their products at a higher price, they are able to retain customers through the unique “Starbucks experience.” As Motley (2007) explains, “The coffee is one factor, but I visit each day because of the energetic atmosphere and efficient operation.” However, the current economic situation poses a weakness for Starbucks due to its premium-priced offerings. While their target audience consists of middle to high-income individuals, the present circumstances make consumers more price sensitive (Velta 2008).
Despite the unfavorable economic situation, Starbucks saw a 6% increase in operating income and a 2% drop in profits in the second quarter of 2009 compared to the previous year (Source: Fiscal Annual Report 2009). Despite a decrease in revenues, Starbucks successfully raised capital in the international consumer product segment, indicating potential for success. Financially speaking, both McDonald’s and Dunkin’ Donuts are strong competitors against Starbucks.
The mentioned companies possess the required resources and abilities to rival Starbucks. Nevertheless, in the present economic conditions, Starbucks is at risk of damaging its brand reputation because of consistently expensive prices for its goods. This is one obstacle that Starbucks is presently confronting.
Moreover, the company performs a PEST analysis to assess external environmental influences. This analysis enables the company to scrutinize political, economic, social, and technological factors and obtain understanding into their consequences. These factors are interconnected and can significantly affect the company’s operations (InfoKits 2008).
From a political standpoint, political decisions can either benefit or harm Starbucks. Factors such as taxation policies, legislative deregulation, international stability, and employment laws all have an influence on companies. Additionally, the downturn of the economy has compelled governments to implement measures that may not always be advantageous for companies. Economic factors like economic growth, inflation rates, RPI (Retail Price Index), globalization, and exchange rates are closely intertwined and can impact the prices that companies, including Starbucks, charge their customers.
Despite being aware of the current economic situation, Starbucks continues to charge customers premium prices. In terms of the social factor, the company should consider income distribution. Although buyers’ power has decreased over time, Starbucks persists in charging premium prices. Furthermore, previously non-price-sensitive customers have become more price-conscious. However, technological factors, like other factors, can potentially benefit Starbucks.
In the short-term, implementing these strategies may be expensive; however, in the long run, they have the potential to decrease costs, increase productivity, and enhance the overall Starbucks experience. Despite encountering various external influences, Starbucks consistently assesses and adjusts its competitive tactics within the coffeehouse sector.
According to Starbucks’ Mission Statement: “Our mission: to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time” (Starbucks 2012), their customers hold immense value as an asset.
According to Drucker, customers’ expectations are impacted by market changes, and they ultimately define a business. In light of both internal and external factors, Starbucks must reevaluate its competitive strategy and enhance its business model to remain the top player in the coffeehouse industry. Failure to do so will result in losing their market leadership position. Hence, it is crucial for Starbucks to integrate customer needs into their forthcoming strategies.