At first, I will assess Starbucks’ external environment using different analyses such as PESTEL analysis, Porter’s five forces analysis, and competitor analysis.
In this text, we will thoroughly examine Starbucks’ strategic capabilities. This examination will involve conducting a resource audit, analyzing the value system, identifying core competences, and acknowledging important stakeholders. Furthermore, we will conduct a SWOT analysis of Starbucks and explore three potential strategic options for the company. Based on the gathered information, I will determine the most suitable option and critically evaluate all employed models and techniques.
In 1987, Howard Schultz purchased a coffee company in Seattle and successfully turned it into a publicly traded corporation with 1,300 stores and over 25,000 employees. By 2002, the number of Starbucks stores had expanded to 5,689 spread across 28 countries. Utilizing PESTLE analysis allows organizations to assess their present and future external environment effectively.
PESTLE analysis is a method that examines various external factors impacting an organization’s success or failure. The acronym PESTLE stands for Political, Economic, Social, Technological, Legal, and Environmental. Political factors involve current and potential influences from political pressures. Economic factors include the impact of the local, national, and global economy. Social factors consider how changes in society affect the business. Technological factors examine how new and emerging technology affects the business. Legal factors consider how local, national, and global legislation affects the business. Environmental factors consider local, national, and global environmental issues.
Starbucks utilizes PESTLE analysis to identify and comprehend important considerations across all aspects of its business operations. Regarding political aspects specifically related to Starbucks’ industry participation: high taxation rates imposed on coffee farmers in certain countries could result in higher costs incurred by Starbucks during their coffee purchasing process; typically such fluctuations in taxation levels are ultimately transferred onto consumers.
On June 13, 2003, Tanzania’s Minister of Finance made changes to local government taxation in order to support the productivity of rural coffee bean farmers. The tax reduction specifically benefited small holder farmers, and this cost saving was expected to be transferred to buyers like Starbucks.* Additionally, the deregulation of the international coffee market occurred about a decade ago when the USA withdrew from the International Coffee Agreement (ICA). This agreement had previously imposed export quotas on coffee-producing nations and helped maintain a relatively stable coffee price. However, with the withdrawal from the ICA, quotas and price controls for coffee came to an end.
Since the deregulation, farmers have experienced a decline in earnings, causing many to give up. International trade regulations and tariffs have a significant impact on Starbucks, affecting the export and import of goods. When foreign governments implement tariffs, it not only leads to inefficiency for Starbucks but also disrupts income distribution fairness.
This additional fee has the potential to transform a good deal into an overpriced purchase. Furthermore, trade relations between the USA and certain other nations have suffered since 9/11.* Starbucks ought to carefully assess the political stability of any country they intend to expand into. Political shifts can result in alterations to taxes and laws.
The outcome of the upcoming American elections might impact Starbucks as it can lead to the introduction of new taxes through new legislation or changes in the existing government. It is also advisable to exercise caution while contemplating new ventures in countries experiencing political turmoil or civil war, such as Zimbabwe at the moment.
International stability is an important factor for Starbucks as it can impact sales and markets. An example of this is the economic downturn after 9/11, which affected the global market. During such periods, it is not ideal for businesses to consider extensive expansion. Additionally, reducing licensing and permit costs in countries where Starbucks sources its coffee beans would help lower production expenses for farmers.
This would lead to cost savings for the purchaser. If interest rates increase, it would have an economic impact on Starbucks and their suppliers as investment and expansion plans are delayed, resulting in a decrease in sales. Furthermore, higher mortgage repayments would reduce disposable income for consumers, leading to less spending on luxury items such as coffee. Conversely, low interest rates would have the opposite effect.
Economic Growth: If there is low economic growth in the country where Starbucks is located, sales may also decline. During periods of negative growth, consumer incomes usually decrease, resulting in less disposable income. Additionally, consumer confidence in products can decrease when the overall economic mood is low.
Inflation rates: Inflation refers to a situation where prices increase. In the UK, it is measured using the Retail Price Index (RPI).
Starbucks will experience increased business costs due to inflation, as well as higher expenses in searching for the best prices for materials. Menu costs will also rise as Starbucks needs to create new price lists. Additionally, inflation creates uncertainty in decision-making by shifting money from lenders to borrowers. Borrowing £1000 during an inflation period will result in returning a lesser amount in real terms due to the decline in the value of money over time.* Moreover, competitive pricing from rivals can spark a price war for Starbucks, leading to decreased profits and profit margins as they strive to increase or maintain their market share.
Globalisation has led to a decrease in farmers’ earnings in the coffee market, potentially reducing the number of people willing to pursue coffee farming as a profession. Consequently, this decrease in supply may result in a decline in Starbucks’ coffee inventory and likely affect their profits.
Furthermore, Starbucks is susceptible to fluctuations in exchange rates when engaging in international trade. If the currency value of a coffee supplier’s country depreciates, Starbucks can take advantage of this situation by obtaining more favorable rates when importing goods back to their home country.
This saving can be passed along to the customer. Exchange rates are constantly changing worldwide in today’s market.
Social: population demographics are crucial for Starbucks as they determine which segments of the population they should target with their products or encourage to visit their stores more frequently. By referring to the table in the case study that displays the percentage of age groups that consume coffee or specialty coffee, it is evident that Starbucks should focus their marketing efforts on individuals aged 35 to 54.
Starbucks should consider targeting the 18-24 age group, as they consume the least amount of coffee compared to other age groups. By encouraging this segment to choose Starbucks coffee now, there is a chance they will continue to be loyal customers in the future. Additionally, Starbucks should take into account the distribution of income when determining their marketing strategy and store locations. Since coffee is considered a luxury product, it is advisable to target individuals or areas with higher disposable income. Lastly, Starbucks should avoid locating in an area where the local population has a negative attitude towards work.
Recruiting, training, and retaining staff would pose challenges due to the demanding nature of the job. Moreover, work attitudes have also evolved, with many urban workers opting to dine outside instead of using internal canteens. Capitalizing on this trend, Starbucks can position its shops as meeting places, attracting a larger customer base during lunchtime.
Starbucks prioritizes the local education standards and skills when choosing new locations, as it is crucial to have a skilled workforce for a thriving business. Quality education enables individuals to gain these necessary skills. Additionally, Starbucks takes into account the working conditions and safety of the area, particularly for those with higher disposable income.
Young single professionals and other individuals will have high expectations when it comes to quality. Starbucks needs to prioritize cleanliness and comfort at its establishments, providing excellent service and addressing any health and safety concerns. The location of each shop should also consider transportation needs for both employees and customers, ensuring easy access to prevent staff from arriving late or customers from choosing not to visit. Furthermore, it is important to note that the average age of the population is increasing and birth rates are remaining stagnant according to research.
Starbucks presently targets its products towards young people, but these preferences may change in the long run as the market for young individuals decreases. However, Starbucks may find it more profitable to expand their target market, even though there is a risk of alienating current customers.* In today’s market, health-consciousness is important, and there is a current trend in western societies towards good health and food associated with healthy living. Starbucks can utilize this information when determining which additional products to sell, besides coffee. Many of their customers are seeking healthier alternatives to traditional coffee accompaniments like cakes and biscuits.
Technological advancements are a top priority for Starbucks. The company continuously strives to enhance its internet services and launched its initial e-commerce website in 1998. Recognizing the need for improved functionality and long-term expansion, Starbucks opted for a significant upgrade in late 1999. To achieve this, they adopted Microsoft Commerce Server 2000, which is among the pivotal software solutions offered by Microsoft.
With the implementation of NET Enterprise Servers, Starbucks has seen improvements in scalability and performance. This has provided the company with the necessary tools to profile and target customers, analyze site data, and deliver new features to the market more efficiently. Additionally, advancements in coffee making machine technology and the computers used for cash registers will enable Starbucks staff to work faster and more effectively. As a result, customers will be served quicker, maximizing the potential to serve a higher volume of customers in a day.
By improving customer relations and increasing the customer base, Starbucks can prevent customers from waiting for long periods of time. To keep up with the competition, Starbucks needs to identify efficient software upgrades, particularly in improving the accessibility of their website (www.starbucks).
Starbucks.com aims to enhance customer service and improve the speed and quality of service in its physical stores. The company’s well-funded Research and Development department continuously explores new menu ideas. The pace of technological advancements in today’s global market exceeds that of three decades ago.
The Internet has had a transformative impact on the worldwide exchange of information. In order to maintain a competitive edge in a rapidly expanding and evolving market, Starbucks must make substantial investments. Additionally, they need to remain cognizant of trade regulations in the countries where they conduct operations and do business, striving for compliance to prevent any infringements.
When importing or exporting goods, it is important to consider religious laws and certain countries’ tariffs. In addition, employment laws can vary from country to country.
When choosing a new location, Starbucks should take into account several factors, including the presence of a Sabbath day, restrictions on weekly working hours, and different minimum wage levels. It is crucial for Starbucks to recognize that certain countries may have less stringent or poorly enforced health and safety regulations. Nonetheless, it is recommended that Starbucks maintains a consistently excellent level of health and safety in all its stores to maintain a favorable international reputation and guarantee adherence to all legal requirements.
If Starbucks fails to uphold high standards, they may face numerous civil cases as they are legally obligated to ensure the safety of their staff and customers in their stores. Moreover, if Starbucks intends to expand its operations, it must consider the potential violation of monopolies legislation due to its possibly excessive market share. Consequently, this could grant them an unfair advantage over other companies within the same industry by allowing them to capitalize on economies of scale and charge non-competitive prices without facing competition.
The Competition Commission’s purpose is to prevent situations like the CC’s thwarting of BskyB’s attempted takeover of Manchester United in 1999. Additionally, Starbucks may need to comply with local planning regulations while constructing or modifying shops, as some plots of land may be protected or unsuitable.
Addressing pollution problems, particularly caused by Starbucks customers discarding their coffee cups on the street, is the responsibility of the local government. To effectively solve this issue, it is crucial to carefully consider the packaging of the cup and ensure it is as biodegradable as possible, avoiding materials that can harm the natural environment.
Starbucks could face the refusal of planning permissions if they intend to construct in an environmentally sensitive location, as there might be safeguards implemented for the land.
To prevent penalties and safeguard their brand image, Starbucks must conscientiously assess their waste disposal practices. Many countries impose stringent regulations on waste management specifically designed for businesses. It is important to mention that a considerable amount of the generated waste will also carry the Starbucks logo.
Environmental pressure groups, including Greenpeace and Friends of the Earth, possess significant physical and influential power. Whenever a company violates animal or environmental rights, these groups promptly stage attention-grabbing protests. As a result, the brand image and customer base of the company are often irreparably tarnished. An essential tool for analyzing an organization’s industry structure in strategic processes is Porter’s Five Forces analysis.
Marketers use it to analyze a competitive environment, concentrating on a single business or SBU rather than a specific product or product range. Porter has identified five competitive forces that impact all industries and markets: the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.
The threat of entry encompasses several factors such as economies of scale, the cost of entry (whether high or low), ease of access to distribution channels, cost advantages not related to company size, potential retaliation from competitors, government action, and the importance of differentiation. Starbucks will constantly face pressure to respond and adapt to these new competitors. The level of competition in the market increases with the ease for new entrants to join. However, this should not be a major concern for Starbucks since they have a significant market share that is relatively unaffected by new entrants.
Starbucks, with its years of experience in roasting specialised coffee, holds a unique advantage in the coffee industry. Competitors would find it challenging to match both the quality and competitive pricing offered by Starbucks. The company’s extensive volume and experience lead to decreased product costs over time. The power of buyers is influenced by various factors. If there is a concentration of buyers, especially those making significant purchases, along with numerous small operators in the supplying industry, alternative sources of supply, a high percentage of component or material cost as part of the total cost, low risk or cost associated with switching suppliers, and the presence of a threat of backward integration by the buyer, then buyer power is likely to be high. Buyer power is also high if the market consists of only a few dominant players or numerous undifferentiated small suppliers. However, for Starbucks, the cost of switching between suppliers remains low.
The power of suppliers is determined by the concentration of suppliers in the market. If there are only a few large suppliers instead of many smaller ones, the suppliers have a higher bargaining power. However, this power is limited. Despite being the most well-known specialty coffee shop chain globally and achieving sales of $3.28 billion in 2002, Starbucks is continually growing and will therefore continue to need coffee beans for the foreseeable future.
In terms of dependency, it can be confidently stated that the suppliers rely on Starbucks as much, if not more, than Starbucks relies on them. Thankfully, Starbucks purchases their coffee beans directly from the originating countries, with Latin America accounting for 50% of their supply, followed by the Pacific Rim at 35% and East Africa at 15%. As for the threat of substitutes, this arises when there is a potential replacement for a product or a substitute for a specific need.
a bald head eliminates the necessity for hair gel, in cases of generic replacement and ultimately the mindset of “we can always make do without…”.
Starbucks could face intense rivalry from existing competitors in the industry, especially if customers start switching from coffee to alternative options like tea.
The high likelihood of entry, presence of substitute products, and attempts by suppliers and buyers to control make the center of the diagram the most potential area of difficulty. Competitors are in balance when they are of equal size, and this creates intense competition as each tries to establish dominance. High fixed costs in an industry can lead to price wars. Differentiation is crucial in commodity markets where products or services lack distinction, as it prevents customers from easily switching between competitors. Starbucks, being unmatched in size by similar competitors, lacks any balanced rivals in the market.
However, in order to remain as the market leader, Starbucks must maintain their excellent standards and continuously seek new innovations.
Competitor Analysis: The coffee industry is experiencing steady growth, resulting in increasing competition against Starbucks. Competitors attempt to gain advantage through price cuts, introducing rival products, aggressively expanding production to increase market share, or making significant modifications to a product that other competitors must also adopt. The following figures depict the current market share of companies in the coffee industry.
According to a resource audit, Starbucks holds various percentages of different coffee outlets and cafes: 35% of Starbucks, 20% of Local Coffee Outlets, 14% of Internet Cyber Cafes, 13% of Caffe Nero, 10% of Costa Coffee, and 8% of Coffee Republic. The strategic capability of any company relies on its resources, which can be categorized as Physical, Human, Financial, or Intellectual capital. In the case of Starbucks, their physical resources include the owned shops, vehicles for goods transportation, and equipment used for coffee and pastry production. The company considers newer and better-conditioned resources to be more valuable.
In 2002, Starbucks had 5689 outlets globally, and this number was still growing rapidly. By the end of the 1990s, the company was opening an average of 2 stores daily. In January 2004, Starbucks celebrated the opening of its 8000th store (www.Starbucks.com).
Human Resources: At Starbucks, human resources refer to the knowledge, skills, and adaptability of its workers.
According to Schultz, the founder of Starbucks, staff who excel in these areas frequently become the company’s most valuable asset. He believes that every staff member, regardless of their position, plays an equal role in creating a positive customer experience. Financial resources, such as capital, cash, debtors, creditors, and money suppliers, also contribute to the company’s success.
Having a minimal amount of debt is beneficial for Starbucks as it enhances the overall appearance of their resource audit. A significant portion of Starbucks’ working capital is invested in various aspects of the business, including different types of whole coffee beans, food items, teas, coffee mugs, coffee grinders, coffee-making equipment, filters, storage containers, and other related accessories.
Intellectual capital refers to the intangible resources of Starbucks, which include brands, patents, customer databases, business systems, and relationships with business partners. These assets hold significant value and are categorized as “goodwill” when the company is acquired. Starbucks protects this intangible information by requiring employees to sign confidentiality agreements to prevent any leaks of knowledge to competitors.
Value-system analysis focuses on the interconnectedness of supplier value chains, firm value chains, channel value chains, and buyer value chains. These links are crucial in the production of a company’s product or service, spanning from raw material acquisition to customer purchase. The value system outlines the specific instructions for product development at each stage, allowing for a comprehensive understanding and management of the entire process by managers. While the firm value chain is of utmost importance to managers as it pertains directly to their company, a skilled manager recognizes the significance of every individual link and relationship within the value system in order to optimize customer value.
In order to fully understand cost and value creation, managers should also familiarize themselves with the entire value system, as a significant portion of this process occurs within the supply and distribution chains. Specifically for Starbucks, their “supplier value chain” pertains to the sourcing of coffee beans, which are essential for creating their end product – a cup of coffee. To minimize costs, Starbucks directly purchases all their beans from the farmers in the producing countries, eliminating the need for intermediaries. These countries can be located in Latin America, East Africa, and on the Pacific Rim.
Starbucks understands the importance of overseeing the entire value system, as exemplified by their commitment to securing the highly coveted Narino Supremo crop in 1992. This acquisition guaranteed that Starbucks would have access to some of the finest coffee supplies in the world. The company maintains close partnerships with their coffee exporters by directly collaborating with and providing training to them.
Maintaining a strong relationship is crucial and essential in this context. The firm’s value chain encompasses various aspects including the firm’s infrastructure and human resource management. The firm’s infrastructure pertains to the desired organization’s operations and the optimal implementation of systems such as planning, finance, quality control, and information management. It also involves the decision to focus on producing high-quality coffee using premium coffee beans, which is connected to quality control. Human resource management involves activities associated with recruiting, managing, training, developing, and rewarding employees within the organization. Starbucks has made decisions in this area as well, ensuring equality among all employees including those working on the shop-floor for over 20 hours a week. Moreover, these employees receive bonuses like free coffee and health care coverage to make them feel valued by the company and enhance their continued provision of excellent service.
Starbucks has implemented a comprehensive 24-hour training scheme for all store staff before allowing them to work directly with customers. Additionally, the company uses technology for various purposes, such as regulating stock levels and operating cash registers. Customers have the option to order coffee online and pick it up in-store. Some stores are also equipped with computers for customer internet access.
Procurement involves acquiring resource inputs for the primary activities, such as obtaining grade A coffee beans from suppliers for use in Starbucks coffee. Inbound logistics for Starbucks includes receiving and storing coffee beans and other products from suppliers, which are then used to make the final products sold in their stores. Operations encompass the stage where Starbucks prepares the coffee and packages other subsidiary products in their stores.
Outbound logistics involve the collection, storage, and distribution of coffee to customers who buy Starbucks coffee from the store. The marketing and sales strategy is crucial in creating awareness and driving consumer purchases. Due to Starbucks’ global presence and strong brand recognition, the need for extensive marketing efforts has diminished.
Most individuals acknowledge the name and link the brand-image with top-notch products. This encompasses all the undertakings that improve or sustain the worth of the product, such as installation, repair, and training.
This paragraph discusses the importance of the staff and customer experience at Starbucks stores, as well as the value chain and sales methods used by the company. It emphasizes the need for friendly and efficient staff and consistently high-quality products. Additionally, Starbucks should be knowledgeable about all products sold under their brand and the sales methods used, as well as the location of each store and its surrounding area to understand customer demographics.
Starbucks should have comprehensive knowledge of all its business partners, including retail estate agents who acquire prime retail locations and foreign suppliers who leverage market conditions. “Customer value chains” elucidate the process by which end consumers enhance the value of the product.
Starbucks can increase customer value by ensuring that the store environment meets expectations, the quality of the coffee consistently meets a high standard, the menu offers a wide variety of options to cater to different tastes, customers feel they are getting value for their money, and above all, the service provided is exceptional. Training and research and development are essential for achieving and maintaining these factors, which should lead to a successful and prosperous future for Starbucks.
Core Competences:
Core competences are essential for firms to gain a competitive advantage. They involve leveraging activities, skills, or knowledge to achieve strategic advantages and possess expertise in product development.
This advantage will provide value to customers. In the 1990s, managers will be judged on their ability to identify, cultivate, and exploit core competences that enable growth – in fact, they will need to reconsider the concept of the corporation itself (C K Prahalad and G Hamel, 1990). The goal for Starbucks is to prioritize competences that truly impact competitive advantage. For Starbucks, these competences include understanding the origins of the finest coffee beans, expertise in preparing them for the best cup of coffee, and successful global expansion strategies compared to their industry competitors.
Core competences are incredibly valuable to Starbucks and their efforts to diversify their product offerings. These competences allow Starbucks to access a wide range of markets. The company has achieved a strong position in the coffee market thanks to core competences like a clear and distinctive brand proposition that targets a specific customer group, as well as exceptional direct marketing skills within their Research and Development department.
Stakeholders are individuals or groups who have an impact on and are also affected by an organization. The stakeholder approach believes that all parties associated with the firm can benefit simultaneously, without one party benefiting at the expense of another.
The firm can generate more profit by working with its stakeholder groups, which include shareholders, employees, owners, suppliers, and customers.
Individual stakeholders may not have significant influence on Starbucks’ performance due to their limited power. However, their influence can increase if they communicate their expectations and grievances with others, forming a unified stakeholder group.
SWOT Analysis: Every organization possesses its own strengths, such as dominant market shares in some cases.
When analyzing companies, it is crucial to consider their perspective. Some companies, despite being small, have the advantage of being able to move quickly. It is important to acknowledge that even struggling companies possess strengths, although evaluating whether these strengths are sufficient requires analysis. Additionally, every organization also has weaknesses.
Whether it is due to a stricter regulatory environment or a company’s vulnerability to competition despite its significant market share, it is evident that even highly competent companies have weaknesses. The impact of these weaknesses on a company’s overall performance, however, depends on careful analysis.
All organizations can benefit from various opportunities, such as diversification and sale of operations. Being able to identify hidden opportunities is a characteristic of a perceptive analyst. No organization is exempt from threats.
These could be either internal factors, such as falling productivity, or external factors, such as lower priced international competition.
Starbucks SWOT Analysis
- Strengths
- Excellent product diversification: coffee, baked goods, cds, and etc.
- Established logo, developed brand, copyrights, trademarks, websites, and patents
- Company Operated Retail Stores, International Stores
- High Visibility Locations to attract customers
Valued and motivated employees: low employee turnover. Good relationship with coffee suppliers. Not a franchise. Coffee industry market-leader. Globalized.
Weaknesses include an ever-increasing number of competitors in the growing market, and clustering of too many shops.
