Thesis on "Starbucks Internal Analyses"

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[EXCERPT] . . . .

Starbucks

Tangible Resources: Starbucks has solid borrowing capacity. The firm issued its first bonds in fiscal 2007 for $550 million (Reuters, 2007). However, their ability to borrow has been compromised by their recent difficulties. Moody's recently downgraded its rating on both Starbucks commercial paper and the long-term debt, the latter of which now sits at Baa2, one step above junk status (Allison, 2009). Internally, the company has only improved equity marginally in the past five years and has not improved its cash position in two years. This points to a weakened ability to raise funds internally.

The company's planning system remains highly centralized, which is a source of strength. The centralized structure allows for a high degree of coordination, which supports the firm's business. Starbucks also operates joint ventures in many international markets. These partnerships take some control away from Starbucks, but ultimately the JV partners are willing to participate in Starbucks initiatives if local market needs are met.

With respect to physical resources, Starbucks has a sophisticated distribution network that allows the company to service its stores quickly and easily. This in turn limits the amount of inventory that each store must carry, lowering associated costs. The company generally has good access to raw materials, and enjoys economies of scale with respect to key inputs such as coffee. They are the largest purchaser of fair trade coffee, for example, and thus have significant control over world supply of that commodity (Starbucks, 2008).

The company has a handful of intellectual property resources, including its brand and its distinctive logo. It also enjoys patent protection over some of its coffee-making technology, including the Clover machine (Starbucks, 2008).

Intangible Resources: A significant amount of Starbucks' success can be attributed to the "Starbucks Experience." The company supports its in-store customer experience through a strong human resources program. The company offers benefits superior to those its major competitors in a bid to attract better front-line talent (Minnick, 2007). Additionally, Starbucks cultivates a strong corporate culture, in particular at the front-line level. This culture is incorporated into the training, but there are also strong controls placed on it. The company utilizes mystery shoppers in order to ensure that employees at the retail level are facilitating a consistent experience (Starbucksunion.com, 2006).

At the executive level, Starbucks' success and size has allowed them to attract and retain top talent. They have on their board senior executives from top companies such as Pepsi, JC Penney and Colgate-Palmolive. Starbucks has maintained the leadership of Howard Schultz off and on for much of the firm's history. Schultz returned to the helm at the beginning of 2008 to help guide the firm out of its recent troubles (MSNBC, 2008).

The return of Schultz marked a shift for the company. They had built their strength primarily with innovation in product development and expertise in real estate. The company's struggles have been attributed in part due to poor choices with respect to real estate. Thus, the return of the former CEO restores the company's former knowledge level of both real estate and coffee drinks. Previous leadership had tried to extend the brand too far, and moved away from the firm's core knowledge base (Linn, 2008).

The return of the former CEO has yet to manifest an improvement in innovation for Starbucks, however. The lack of innovation was cited by Moody's in their decision to downgrade the company's debt rating (Allison, 2009). Essentially, Starbucks' capacity to innovate has been constrained by the parameters of their business. When they attempted to move into other areas, such as media, they detracted from the value of their brand. As a result, they also began to make poor decisions, opening too many stores too quickly. The firm is now focused on overseas growth as the engine of their future success, rather than innovation in product development or brand extension. The company's apparent lack of commitment to innovate is also reflected in its research and development budget. Starbucks spent just $7.2 million on research and development in 2008 (2008 Annual Report), a year in which they had revenues of $10.383 billion.

One of the main sources of competitive strength for Starbucks remains with its iconic brand and logo. Widely recognizable even outside their core markets, the brand is supported by the consistency of the Starbucks experience. The product is viewed as reliable and the brand as durable over time. If there is any major problem with the brand, it is that it constrains the company because of its tight association with the coffee house business. Starbucks has little opportunity to leverage the brand outside of its current business, so the only long-term source of growth is through international expansion.

The company's reputation within the business community is generally positive. Starbucks is viewed favorably by suppliers, not only for the volume it provides but for its general sense of ethics. The company enjoys a reputation for engaging external stakeholders in controversial issues and for helping the neighborhoods in which it operates (Gebler, 2005).

Capabilities

Throughout much of Starbucks' history, the firm has cultivated the resources necessary to achieving its goals. In as much as they focused on developing coffee products, they expended substantial energy on developing competencies in real estate, distribution and customer experience. The firm's environment, however, appears to have shifted in recent years. Competition has become more intense, and Starbucks has seen a slight deterioration of its brand as a result of saturation in the United States. This has put them into direct competition with fast food outlets such as McDonald's and Dunkin' Donuts, both of which have moved aggressively into the coffee business. Starbucks had previously been able to defend its position and had done so in part via their saturation strategy. The result, however, was the commoditization of their product. In light of this changing environment, the company needs to develop new competencies. They are weak in innovation and expend very little money on research and development. Yet, going forward this is precisely where Starbucks needs to outperform their rivals. They need to find ways to differentiate their business from the fast food outlets in order to continue charging premium prices on their products. So while Starbucks has retained and even strengthened with the return of Schultz the competencies that make them a strong company, they do not yet have the competencies in innovation that will help them to defend their business in the future.

The move towards increased innovation must begin at the executive level. There is little indication that Starbucks has the right people in place to improve this aspect for their organization. Thus, the human resources capabilities do not support this important component of their business. For the most part, human resources at Starbucks has supported its strategy in the past, but the bulk of their employees lack innovative skill. Moreover, the focus on standardization of product and service specifically devalues innovation among the vast majority of Starbucks employees. The corporate culture does not support innovation either.

With respect to other areas where capabilities must be distinctive, Starbucks does have an excellent support system. The company is strong in customer experience, in distribution, in marketing and in real estate. At present, it could be argued that the historical emphasis on real estate expertise is less necessary now as the company slows its domestic growth. With the emphasis of new store openings shifting to overseas markets, Starbucks should de-emphasize domestic real estate competency and increase emphasis on international operations.

In particular, the company should improve its capabilities with respect to international logistics. Starbucks has a strong logistics strategy in the domestic market, and has successfully begun to translate that to overseas markets as well. As Yum Brands work in China indicates, success in logistics can be a key source of competitive advantage in the developing world, where procurement and transportation capabilities are diminished (SupplyChain.cn, 2005).

The crisis facing Starbucks is that at present its capabilities have been built to achieve a desired end state, and for the most part the company has achieved that state. The competitive environment has shifted significantly in recent years and the company's focus has also shifted. The firm appears to have a poor grasp of what its new desired end state should be, and therefore has not taken the states required to adjust the its capabilities and competencies accordingly.

Core Competencies

Starbucks at present has developed an expertise with regards to the customer experience. They have carefully managed both the product and the store atmosphere so that there is consistency of experience around the world. This consistency in turn helps to drive sales, since it is strongly associated with the Starbucks brand. That the Starbucks Experience is so recognizable helps to build the strength of the brand, allowing the company instant recognition when they expand. Moreover, the experience and brand have a premium position in the marketplace, which allows the company to attain higher margins and in part to fend off competition from lower-end fast food chains.

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