Starbucks Global Strategy Essay, Research Paper
De Wit and Meyer (1998) refer to market tendency towards homogeneous variety and tighter international linkages as globalization. The need for global strategy is outlined by the fact that companies are subject to global forces and consumer demands. As a consequence, firms are faced with a challenge of modifying their existent strategies to gain and sustain their competitive advantage in a rapidly changing environment. A well-designed global strategy can help a firm to gain a competitive advantage, that as identified by Sumantra Ghoshal of INSEAD can arise from Efficiency, Strategy, Risk, Learning and Reputation (Appendix1). Therefore, to create a successful global strategy, managers first must understand the nature of global industries and the dynamics of global competition.
I would like to proceed with my analyses of the global market place, with examination the young but already well recognized brand world wide – Starbucks. In my research I will explore on changes in the product, operations, and strategies at Starbucks influenced by the changes in the global marketplace. Due to word limitation on the essay, please refer to Appendixes for more detailed information.
Starbucks Corporation
“There is untapped potential to grow our company internationally,” Schultz said.
Headquarters:
Seattle, Washington
www.starbucks.com
Ownership:
Starbucks is publicly traded — shares are widely held
150 million shares have been authorized, of which 59.6% are on the market.
History:
Howard Schultz, 42, is the founder of the Company and has been chairman of the board and chief executive officer since its start in 1987. The Company originated with eleven Seattle stores and less than one hundred employees. Since them the company has grown to a half billion-dollar company serving millions of cups of coffee per week in one thousand stores throughout the country, and in 17 countries internationally. Schultz believes his company will succeed well into the twenty-first century. He states, “One of the things that you can’t measure on a balance sheet or on a financial statement is the soul of Starbucks.”
The Company holds approximately 39 federal trademark registrations in the United States. They have approximately 44 additional applications pending in the U.S. The Company currently owns one patent in the U.S. for its coffee on tap system and has several patent applications pending.
Starbucks prides itself on being a “good citizen” locally and in the various coffee producing countries. They make significant contributions to local charities that focus on children, the environment, the homeless, and AIDS research/support.
Operations structure:
The Company is organized into a number of business units.
· The Company ’s North American retail business sells coffee beverages, whole bean coffees and related hardware and equipment through Company-operated retail stores in the United States and Canada.
· The Company ’s international retail business consists of entities that own and operate retail stores abroad. These two retail segments are managed by different presidents within the Company and are measured and evaluated separately by senior management.
· The Company operates through several other business units, each of which is managed and evaluated
independently. These other business units are organized around the strategic relationships that govern the
distribution of products to the customer. These relationships include retail store licensing agreements,
grocery channel licensing agreements, wholesale accounts, joint ventures and direct-to-consume
marketing channels. Revenues from these segments include both sales to unaffiliated customers and
inter-segment sales, which due to annual report are accounted for on a basis consistent with sales to unaffiliated customers.
Starbucks and its subsidiaries (”Starbucks” or the “Company”) include Starbucks Corporation and its wholly owned subsidiaries:
· The Coffee Connection, Inc. (”The Coffee Connection”),
· Starbucks New Venture Company (”Starbucks New Venture”),
· Starbucks Coffee International, Inc. (”SBI”),
· Starbucks Holding Company.
· (Appendix H)
Product:
Starbucks Corporation and its subsidiaries buy and roast high quality whole coffee beans. To insure high quality of the product, Starbucks built three roasting plants of his own, where highly trained and experienced personnel monitors roasting of beans (Appendix C). Quality standards are so high that entire batch is thrown away after testing if qualifications differ from acceptable standard.
Later beans are sold in primarily company-operated stores along with fresh, rich-brewed coffee, Italian-style espresso beverages, decaffeinated beverages, cold blended beverages, variety of pastries and confections, coffee-related accessories and equipment, and a line of premium teas. Retail sales brake down is roughly 61 % coffee beverages, 15% whole-bean coffees, 16% food items, and 8% coffee-related products and equipment. Product mix varies with the size and location.
Starbucks sees its success sustainability in constant development of its products to bring new experiences and ideas to loyal customers of their cozy “coffee-empire,” (Appendix B). High quality of a product that will appeal to coffee lovers around the world is Stabucks’s main consideration.
Marketing and Product Design:
A branding strategy must work well with marketing strategy.
Starbucks sells a lifestyle, to customers and employees alike (Appendix E). It has learned from the experience of Pepsi and others to link its brand to new trends. Therefore Starbucks’ success could be attributed to objective to meet their customers needs and innovate new product offerings.
Selecting a marketing strategy based on a product mix is a key to Starbucks success. Coffee is the second most traded commodity in the world. As a result, Starbucks is forced to adopt a high product differentiation strategy. Product differentiation defined by branding a product and marketing it effectively to target audience. This strategy differentiates company from the competition, making its product unique, targeting quality, service, and price conscious customer.
Starbucks’ distinct branding strategy involves creating a coffeehouse as a place inspiring customers to socialize. As they managed to set up design teams to constantly innovate and create better product and store designs (Appendix D). However, expansion is also beginning to conflict with brand image. The danger with an extensive product mix is a weaker brand image. Strong competition is always a threat to the company’s target market and thus even with a branding strategy, coffee is an easy substitute if other companies get serious with their own promotion. Starbucks cannot exclude from others their ability to walk into any store, study its layout, atmosphere, and product range, and copy the coffee bar concept. Thus the highest value-added element of the Starbucks formula is not excludable. It is also hard to charge a premium for coffee if customers can pay less for the same amount of caffeine and comfort just down the street. Similarly, to compete on costs Starbucks needs a flexible workforce with low wages and every danger of staff being poorly motivated, it is hard for such firms to cultivate customer-friendliness. As a result, Starbucks’ has long emphasized human-resource policies (Appendix E). So in order to distinguish themselves from other coffee makers, Starbucks must continue to transmit a strong corporate identity with their customers. After all, customers that come to their retail stores are the primary source of Stabucks’s revenue.
Starbucks is brand name sensitive, and is seeking to develop partnerships with companies who share their same commitment to quality. Kraft is a partner to Starbucks marketing strategy. Kraft handles distribution, marketing, advertising, and promotion for Starbucks. They distribute products to the grocery, warehouse, and other outlets.
Starbucks retail stores are usually located in high-traffic locations and high visibility areas. To reduce risk of failure and economic fluctuations properties for the stores are leased. Brand name recognition of Starbucks therefore comes from people being frequently exposed to it. As a result, Starbucks carefully selects their market and store locations.
Competition:
Industry ranking as of April 1, 1999, particularly having coffee products:
Company Name
STARBUCKS CORP:
FARMER BROS CO:
CHOCK FULL O NUTS CORP:
GREEN MTN COFFEE INC:
COFFEE PEOPLE INC:
BROTHERS GOURMET COFFEES INC Market Capital($000)
$5,335,000
$395,000
$64,000
$21,000
$21,000
$2,000
The companies above mainly roast, pack and distribute coffee. Their core material: green coffee beans. Farmer Brothers sells to hotels, restaurants, and fast food outlets. Chock Full O Nuts is the fourth largest in this industry. It presents instant and specialty coffees such as LaTouraine and Cain’s. Green Mountain’s profile mentioned the two distribution channels it is focused on – wholesale and direct mail. Like Starbucks, Green Mountain considers growth with brand recognition and availability of its products. With 246 franchises so far, Coffee People is the second largest distributor of specialty coffee. Coffee People recently ventured with Gloria Jean’s Inc. None of the latter five companies is able to match the market capital achieved by Starbucks.
Starbucks management identifies competitors in restaurants, shops, street carts and supermarkets. Where own machines are being set up to serve espresso, cappuccino, Latt?, and other coffee drinks to their customers. They are also faced with other mail order suppliers and wholesalers.
Product Supply: Coffee Prices, Availability, and General Risk Conditions
Global supply literature suggests that even though global supply chain allows for cost reduction, it is much more complex than domestic one, and calls for tight controls. Since coffee prices are unstable due to weather, export regulations, economic, and political conditions in the growing countries of Colombia, Sumatra, Yemen, Antigua, Indonesia, Guatemala, New Guinea, Costa Rica, Sulawesi, Papua New Guinea, Kenya, Ethiopia, Java; it is not surprising that Starbucks is concerned with the supply and prices of this commodity.
Starbucks enters into fixed-price purchase commitments and/or purchased futures contracts to secure the company from danger of price fluctuations and supply shortages. As of October 1, 2000, the Company had approximately $84 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee for the majority of fiscal 2001.
Vice president for coffee, travels regularly to coffee-producing countries to built relationships with growers and exporters, and find products that would meet Starbucks’ standards of quality and flavour. The Company believes that based on relationships established with its suppliers in the past, the risk of non-delivery on such purchase commitments is remote. Speciality items and coffee accessories however are purchased from local sources and manufacturers.
Starbucks partnerships and joint ventures with suppliers described bellow are another way for the company to retain supplier sustainability and involvement. Therefore according de Wit and Meyer (1998) co-operative strategy benefits Starbucks in reducing risk of failure (Pepsi) and non-delivery, cutting costs, preserving quality, creating innovation (Frappuccino bottled), abandoning associated wastes (referenced in “Joint ventures, Partnerships” paragraphs bellow). To ensure that partners share in Starbucks success, eligible partners are provided with stock option grants under the Bean Stock Plan for the 10th consecutive year.
The ability to find optimal store locations with lower rents, costs of operations and qualifying personnel also contributes to their future. Starbucks management believes they have good relations with their employees and the risk of non-delivery of coffee is low.
Visionary leadership, internal and external cooperation, learning, process management, continuous improvement, customer satisfaction, and employee fulfillment are attributes to almost smooth operations in Starbucks supply chain.
Joint Ventures:
There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.
· PepsiCo and Starbucks entered into a joint venture in 1994. Efforts were combined towards creation of new cold coffee drinks in bottles and/or cans and their mass distribution through Pepsi channels. Joint venture with multinational giant Pepsi was to open great international exposure for Starbucks, and shift business into more mainstream markets. While first product, Mazagran, resulted in failure. Bottled version of Frappuccino tested in 1996, succeeded. Leading to the partnership investment into three bottling facilities to make Frappuccino in September 1996.
· In October 1995 Starbucks partnered with Dreyer’s Grand Ice Cream to supply coffee extract for a new line of coffee ice cream made and distributed by Dreyer’s under the Starbucks brand.
· The new line, featuring six flavors: Dark Roast Espresso Swirl, JavaChip, Vanilla and others, they appeared in supermarket in April 1996, and became top-seller by July.
· In 1997, two new low-fat flavors were added and were well accepted in the marketplace. Additional new ice cream products were planned for 1998.
· In 1995, Starbucks worked with Seattle’s Redhook Ale Brewery to create Double Black Stout, a stout beer with a shot of Starbucks coffee extract in it.
· In October 1995, SBI signed an agreement with SAZABY Inc., a Japanese retailer and restaurateur, to form a joint venture, which will primarily develop Starbucks retails stores in Japan.
· In August 1996, SBI signed an agreement with Bonvests Holdings Limited to open retail stores in Singapore.
· United Airlines has joined the ranks of Delta and Horizon Airlines in serving coffee on board. Starbucks set up strict quality control on 500-plus United planes with varying equipment, and Starbucks became the coffee supplier to the 20 million passengers flying United each year.
· According to Financial Times (may1st, 2001), Compaq Computer Corp. and Starbucks Coffee Co. announced a five-year, $100 million deal in which Compaq will equip the coffee shop chain to give its customers wireless Internet access while they sip their Caf? Latte.
· Starbucks has also collaborated with Capitol Records Inc., on two Starbucks jazz CDs, available in Starbucks stores.
Joint venture income was $20.3 million for fiscal 2000,compared to $3.2 million for fiscal 1999.
The increase was primarily due to the crossover from losses to profitability of Starbucks Coffee Japan
Limited as a result of an increase in scale, and due to the improved profitability of the North American business.
Licensed Stores and Speciality Sales: Growth of Distribution Channels
The company does not offer franchising opportunities. Though in recent years Starbucks had begun entering into a limited number of licensing agreements for store locations in areas where the company was not able to locate their shops due to limits in capability. There is much value in transferring knowledge and best practices between parts of a global firm. To protect Starbucks quality brand information is carefully shared with licensees through training, at the same time the Company assures tight strategic control.
Therefore, to maintain its mission of making Starbucks into a global brand, the company has taken an aggressive approach into various national/international distribution channels, like: fashion retailers, airports, airlines, hotels, and book stores described below:
· Marriott Host International entered an agreement to operate Starbucks retail stores in local/foreign airport locations.
· Hyatt agreement to distribute products internationally.
· Agreement with ARAMARK Food and Services to put Starbucks stores on university campuses and other locations operated by ARAMARK
As a result of licensing arrangements Starbucks received royalty fees, and supplied coffee for resale. Tight control over quality of operations was established to protect own brand image.
Specialty sales groups provided Starbucks coffee products to restaurants, airlines, hotels, universities, hospitals, business offices, country clubs, and select retailers.
· Horizon Airlines, a regional carrier based in Seattle
· Nordstrom’s received the contract for sale of Starbucks coffee only in Nordstrom stores
· Barnes & Noble
· Selected Wells Fargo Bank locations in California.
· Chapters, a Toronto book retailer with sites throughout Canada.
· Costco warehouse club stores.
· A 1997 agreement with U.S. Office Products gave Starbucks the opportunity to provide its coffee to workers in 1.5 million business offices.
· In 2000 Albertson ’s, Inc., Safeway Inc., Dayton Hudson Corporation (Super Target stores) and Marriott International, Inc, signed licensing agreements.