Term Paper on "Starbucks Strategy"

Term Paper 7 pages (2415 words) Sources: 5

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Electronic Health Records (EHR) -- Pharmacy

Starbucks

Starbucks Core Strategy: Differentiation.

The Starbucks strategy is a differentiation strategy: to provide high-quality coffee and related beverages/food and products as part of a total "experience" for the customers. The "Starbucks experience" has long been modeled on the idea of an Italian coffeehouse, which serves as a place not only for fine coffee beverages, but for sitting and relaxing, talking with friends, and the like. Additionally, Starbucks focuses tremendous attention on customer service, further supporting its differentiation strategy.

When the company first began serving coffee beverages, it's primary competitors were (1) convenience chains like Dunkin' Donuts and McDonalds, who served basic drip coffee in a fast-food setting with no frills; (2) sit-down breakfast establishments which were not focused on the "grab and go" coffee drinkers; and (3) independent coffee houses, none of whom held a strong position of dominance in their individual markets. Starbucks took a first mover advantage in the market, creating essentially an entirely new category of gourmet coffee that offered both the leisurely experience of a coffee house and the convenience of a fast-food establishment, depending on the customer's preference at any time.

This cornerstone of this strategy is based on establishing the value of the product as a premium offering in the customers' mind, which then supports selling at premium price. In fact, "the prices found at Starbucks Coffee are significantly higher than the market average. The higher prices are a direct result of their ingenious marketing strategy… Starbucks Coffeehouses began to give consumers a different kind of feeling about drinking coffee." (Starbucks Coffee -- The History and Background of Starbucks Coffee).

One significant element supporting the Starbucks strategy has been its focus on employees. This was seen as an essential part of creating and sustaining a unique, high-quality customer experience and company culture. Starbucks has been widely recognized for its pioneering approaches, such as providing extensive training to all new employees, and offering benefits even to part-time employees. It was the first company to do so (Starbucks Company History). This strategy, while perhaps increasing payroll costs, nevertheless served to help the company attract and retain talented, dedicated employees who sustain the company culture and value/quality-based premium brand.

These strategies targeted an educated, upper-middle class demographic, "creating an affluent and vibrant cafe society in upper-middle-class suburbs, high-income city neighborhoods and prestigious college campuses." (Bowman, 2008). These components have formed the foundation of the successful Starbucks strategy. Today, the company is the largest coffeehouse company in the world. It has 16,635 stores in 49 countries, which includes 11,068 in the United States, stores in 55 foreign countries such as Japan, the United Kingdom, Canada, and even places like China. (Starbucks).

In the past two years, however, economic recession has buffeted the United States and many other regions of the world. The market interest in premium products has declined and many consumers began to look for places to cut spending, often starting with their daily latte. Additionally, new low-cost entrants such as McDonalds with its McCafe product are challenging Starbucks' primacy as a purveyor of gourmet coffee.

In response to these changing economic conditions, Starbucks adopted a strategy of closing stores in the U.S. that was effective in reducing costs and improving earnings (Refer to Appendix 2). In 2008 and 2009, more than 900 Starbucks stores were closed in the U.S., as well as some abroad, saving the company nearly $600 million in annual costs. Now, "Starbucks expects to generate free cash flow of around $1 billion for the fiscal year ending in September." (Investorguide). This improved performance has also been reflected in rising stock price since the end of Q3 2009 (Refer to Appendix 3).

Other Strategic Elements

In more recent years the company has pursued several additional strategies of note, that have had mixed effectiveness. Starbucks has continued to sells drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, coffee beans, pastry, snacks, and items such as mugs and tumblers. But the company has also worked to extend its reach into other areas of its customers' lifestyles (and wallets). These forays into new product categories have been undertaken carefully, with great attention paid to making sure the new offerings were still consistent with and of a commensurate quality with the brand, and the Starbucks "experience," and would appeal to the Starbucks customer. These new offerings include:

Music and books -- Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. "Hear Music began as a catalog company in 1990, adding a few retail locations in the San Francisco Bay Area. Hear Music was purchased by Starbucks in 1999." (Starbucks). Subsequently the Hear Music began to produce and release its own musical compilations, and then exclusive new CDs by leading artists such as Paul McCartney. Expanding on its initial foray into the music business, Starbucks partnered with Apple to collaborate on selling music as part of extending and enriching the "coffeehouse experience" with multiple points of integration between in-store music, CDs and iTunes. (Starbucks). However, in 2008 the company chose to step back from day-to-day participation in the music business. In response to recessionary pressures, Starbucks decided to refocus on its core coffee business, instead turning over its music operations to another firm. (Groom and Bertlein, 2008). It still sells a select number of CDs in stores.

Instant coffee -- in 2009, Starbucks introduced the VIA packets that customers can mix with hot water to have an instant cup of Starbucks coffee. While sales results on the product are not yet clear, Wall Street appeared to respond well to this new strategy, as the Starbucks stock price tripled in the first nine months after its launch. (Thompson, 2010).

Operational Characteristics (Organizational Audit, Past and Present)

When Starbucks was first founded in 1971, it was a specialty retailer of dark-roasted coffee beans and coffee products (e.g., coffee makers) -- the original seeds of its differentiation strategy. After Howard Schulz joined the company in 1982 and expanded its operations to include coffee service, inspired by "the popularity of espresso bars in Milan [and] the potential to develop a similar coffeehouse culture in Seattle." (Starbucks Company Timeline). In 1984, "the first Starbucks® Caffe Latte is served." (Starbucks Company Timeline). This provides the company with a "first mover" advantage that allowed it to create and define the "gourmet coffee" category that it dominates to this day.

Once the original concept and strategy had been provide in the Seattle market, the company focus shifted to growth and geographic expansion, first in Chicago and Vancouver, B.C. After working out a few early kinks, the company then continued expansion into Portland, Los Angeles, and then San Francisco, experiencing strong growth and easily hitting expansion targets. "Starting from a base of 11 stores, Starbucks opened 15 new stores in fiscal 1988, 20 in 1989, 30 in 1990, 32 in 1991, and 53 in 1992 -- producing a total of 161 stores. The opening of 150 new stores in five years significantly exceeded the 1987 business plan's objective of 125." (Starbucks as a Private Company: 1987-1992). The company's expansion strategy rested on opening only company-owned stores, no franchising. The carefully nurtured Starbucks "experience" and customer-focus was considered essential to the brand and the company's success, so "franchising was avoided so as to keep the company in full control of the quality of its products and the character and location of its stores." (Starbucks as a Private Company: 1987-1992).

In terms of driving continued revenue growth, the company strategy has long rested on opening new stores in both current markets and expanding into new markets, but along with rapid growth and geographic expansion comes operational challenges, such as distribution and supply chain management. To address these challenges, "[i]n 1992 and 1993 Starbucks developed a three-year geographic expansion strategy that targeted areas" (Starbucks Corporation: Public Company 1992-) that presented favorable market demographics, but also markets that could be

"serviced and supported by the company's operations infrastructure. For each targeted region, Starbucks selected a large city to serve as a "hub"; teams of professionals were located in hub cities to support the goal of opening 20 or more stores in the hub in the first two years. Once stores blanketed the hub, then additional stores were opened in smaller, surrounding "spoke" areas in the region." (Starbucks Corporation: Public Company 1992-)

This proved to be an effective strategy to increase profits, by supporting continuing expansion on the revenue side, while mitigating the risk of parallel increases on the cost side. For example, in 1992, the company posted net revenues of $103.197M and earnings of $4.454M (4.3% of net revenues), then in 1993 had net revenues of $176.541M with earnings of $8.282M (up 4.69% of net revenues). This shows an increase in revenues of 71% while earnings (profits) increased during the same period by 86% (Refer to Appendix 1). Starbucks also benefitted from increasing per-store revenues overall: in 1995, new stores generated $700,000 in revenue… READ MORE

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