Posted: May 25th, 2022

Management of Change Within Starbucks

Management of Change Within Starbucks

Starbucks’ rapid expansion globally first as a specialty coffee retailer and later as a provider of quick service breakfast and lunch items has also amplified the impact of consumers’ preferences and requirements, competitors strategies’, and suppliers’ sourcing strategies on the organisation as well. The strategically important internal processes within Starbucks, from defining new dealer locations to defining the criteria to creating Fair Trade supply chain partnerships are forcing the company to change how it evaluates and responds to change (Marahao, Carrieri, 2007). Starbucks’ senior management realizes that they must become first a learning ecosystem, quickly transferring knowledge, sharing it through their dealer channels and with suppliers, if the company is going to be able to continually grow (Marahao, Carrieri, 2007). To Starbucks, knowledge transfer globally is just as important as their rapid new product introduction process and the center of their unique value proposition, which is the creating of exceptional experiences for each customer globally every day (Verhoef, Lemon, Parasuraman, Roggeveen, Tsiros, Schlesinger, 2009). While many of Starbucks’ competitors both in the specialty coffee retailing and quick service restaurant marketplaces are concentrating on cost reduction strategies and sending their prices into freefall, Starbucks continues to be fiscally responsible and track costs while also investing in the overall experience that each Starbucks location provides, and the unique taste experience of their coffees and food items. Its value chain (Porter, 1986) is unique and differentiated, supporting the delivery of exceptional experiences and high quality coffee specialty drinks and quick service food items. This analysis will provide an assessment of how Starbucks has organized its internal systems, external processes and how its foresightful use of alliances globally (Segil, 1998) including being one of the first to actively work for Fair Trade purchasing, procurement and supply chain practices globally (Fridell, 2009).

Analyzing Starbuck’s Internal and External Forces of Change

What has successfully differentiated Starbucks from its thousands of smaller competitors is their deliberate attempt to break past the generic competitive strategies that pervade specialty coffees and fast food. The strategies of lowest cost, largest selection or high price based on exclusivity do not have financial scalability in the specialty coffee and fast food markets (Pretorius, 2008). Instead Starbucks continues to focus on creating a unique experience that is highly differentiated by a continual release of new drinks, food items and alliances to further differentiate the experience of purchasing and consuming their products. Differentiation in service industries has moved beyond price and today includes the delivery of exceptional customer experiences that can be counted on happening during each visit to a service location (Rae, 2006). Starbucks then is actually in the business of delivering exceptional experiences supported by exceptionally high levels of product and service innovation internally. This is the ideal Starbucks attempts to create in their selling and service strategies, all supported by knowledge management and the sharing of tribal knowledge globally (Marahao, Carrieri, 2007).

In assessing how Starbucks’ manages the many internal and external forces of change and seeks to capitalize on them for gaining innovation in new product development, retail store enhancements and improvements, and ultimately the delivery of consistently exceptional customer experiences, the Porter Five Forces Model (Porter, 2008), often referred to as the determinants of competitive advantage, is used. The Porter Five Forces Model is shown in Figure 1 (Porter, 2008).

What makes the Porter Five Forces Model relevant to evaluating the internal and external forces of change impacting Starbucks is their inclusion of existing and potential competitive dynamics, the influence of suppliers both within and outside the company, the threat of substitution, and the consumers’ significant influence on Starbucks’ global growth. All of these factors taken together define the competitive rivalry in a given industry, and also provide insights into its unique strengths and sources of productivity as well (Porter, 2008).

Assessing Starbucks’ competitors using the Five Forces Model provides insights into how the global coffee retailer has been able to cannibalize its smaller competitors and quickly outdistance them through product and service innovation. McDonald’s is increasingly defining itself as a Starbucks competitor with its McCafe’ launch throughout the U.S. (Churchill, 2008) hoping to attract up-market coffee consumers away from Starbucks. This strategy on the part of McDonald’s however has proven to be fragmented throughout the country and served to highlight how Starbucks competes on a regional basis more effectively than others. The McCafe’ strategy has actually taken competitors away from regional specialty coffee and fast food chains including Gloria Jean’s Coffee Shops and Diedrich Coffee (Churchill, 2008). Dunkin Donuts dominates the Northeast U.S. market for specialty coffee and quick service food items including donuts, croissants and small sandwiches. The largest competitor that Starbucks faces in the U.S. is Caribou Coffee, which has only a fifth of the stores in the country as Starbucks (Churchill, 2008). With one coffee house for every 13,000th American, the entire market nations’ market (Churchill, 2008). Taking into account just how fragmented the coffee retailing marketplace is with McDonalds being the only nationally-based competitor and Gloria Jean’s being the only competitor with locations in Asia-pacific regions, Starbucks dominates the competitive landscape (Rae, 2006).

Using the Porter Five Forces Model to analyze Starbucks’ competitors also shows that given their fragmentation they are not protected from severe economic downturns, and struggle to gain loyal customers over time. The global economic recession which began in 2008 eventually began to impact the sales of specialty coffees and drinks, eventually forcing Starbucks to close up to 977 stores globally, with 200 in the U.S. And 100 overseas closing (Churchill, 2008). In addition Starbucks had to also reduce their workforce by approximately 6,000 employees worldwide (Churchill, 2008). How quickly the global economic recession impacted Starbucks showed that despite its sizeable market share and near cannibalization of entire neighborhoods and sections of cities, it still had not attained the level of customer loyalty critical for long-term financial stability. Competitors did not fare much better however, and the reliance on the generic strategies of relying purely on pricing and reducing food prices through bundling started price wars throughout this industry (Pretorius, 2008). Starbucks’ fired the first global volley in the price war with the introduction of a low-end coffee at $1.69 per cup (Churchill, 2008) which many argued would drastically reduce the value of the Starbucks brand globally and ignored their core strength in delivering exceptional experiences. The subsequent reactions by Starbucks to the nearly knee-jerk reactions of competitors in drastically reducing their prices and bundling snacks and small sandwiches (in the case of Dunkin Donuts) shows who rapidly competitive forces impact the company. Despite its pervasive distribution strategy, Fair Trade supply chain, continual pursuit of a unique experience in its stores, and strong research & Development (R&D) programs, the company could not shield itself from the competitive fragmentation that is still re-ordering this industry.

While the fragmentation of the industry makes competitive pressure nearly instantaneously felt by large and small retailers and food providers alike, the pressure from a second strategic factor, substitute products, can be even more lethal. This pressure from substitute products, which are collectively known as nutrition-enhanced caffeinated beverages including Sobe, Red Bull and many others, pose the most serious strategic threat to Starbucks over the long-term. The fact that Starbucks is one of the only coffee retailers globally to attain critical mass in retailing stores (Churchill, 2008) has given them the ability to overcome this competitive threat to date. Yet the pervasive adoption of Red Bull, RockStar energy drinks and Sobe specifically all threaten the retail chain dominance of Starbucks. Even more fundamental than this however is the fact that competitive drink manufacturers have the ability to scale into retail, locations much more rapidly given their channel strategies and internal systems being more oriented to multi-channel, not just retail, operations, service and support. Starbucks is at a disadvantage from a system level to these competitors as a result as well, as Coca-Cola is continually improving energy drinks Burn, Buzz, Full Throttle, Powerplay, Samurai and others. Starbucks realizes that the global reach of competitors including Coca-Cola, combined with their expertise in multichannel management poses the greatest strategic threat to those loyal coffee drinkers and food purchasers who look for an energy uplift from purchasing their products. This factor is forcing Starbucks to invest $7.2 million in technical research on average every year to stay competitive (Churchill, 2008). Clearly the threat of substitutes is very significant and influences the product strategy that Starbucks is investing in today.

Using the Porter Five Forces Model to analyze how consumers are re-ordering the specialty coffee and associated fast food market also shows that customer loyalty is one of the most critical aspects of the industry’s profitability as well. Research completed by BusinessWeek from interviews with Starbucks executives indicate that up to 80% of the company’s revenue are generated from customers who visit their stores an average of 18 times per month (Rae, 2006). The senior management teams at Starbucks realize that nurturing and growing customer loyalty over the long-term will dictate whether the company will be able to retain its gross margins above industry average (Helm, 2007), a significant accomplished despite their slow decline over the last five years. Please see Appendix a for a give year ratio analysis of Starbucks Corporation illustrating the significant effect the recession is having on gross margins. Yet despite this pressure, Starbucks continues to be successful in keeping its gross margins above industry average at 9.67% for the latest fiscal year. Also noteworthy about their financial performance is the increase in Revenue Per Employee from $53,864 in 2004 to $59,156. This speaks to the fact that Starbucks is being successful with their long-term strategy of delivering exceptional customer experiences, so much so that there is greater levels of repurchase of drinks and food even in a recession (Churchill, 2008). All of these factors point to the critical need for managing customer experiences more closely than ever, with a strong orientation towards giving customers and opportunity to have their voices heard on potential new products. Starbucks has excelled in the area of social networking, creating My Starbucks Idea, a website dedicated to capturing the ideas, concepts and concerns of customers. My Starbucks idea is also promoted heavily on the company’s Twitter and Facebook accounts as well. Starbucks also is mentioned throughout the best-selling book Groundswell, one of the most critically acclaimed books on social networking today (Bernoff, Li, 2008). The use of multiple social networking websites and approaches to listening to customers has emerged as one of the most dominant strengths of the company in the last three years as well (Bernoff, Li, 2008). In summary, the bargaining power of buyers is significant and customer loyalty is directly proportional to the profitability of this industry (Rae, 2006). The dynamics of customer loyalty in this industry have also proven to enable it to be more protected from recessionary pressures compared to airlines and other service industries that rely purely on price over any other factor, including delivering exceptional experiences (Verhoef, Lemon,

Parasuraman, Roggeveen, Tsiros, Schlesinger, 2009).

Suppliers are the last factor in the Five Forces Model, and in this area Starbucks has worked to create the ethical and green or eco-friendly initiatives work to their advantage (Fridell, 2009). Suppliers today in the coffee industry control the balance of power in relationships. The entire industry is highly dependent on the futures prices of coffee beans and also on the costs of dairy products as well. The costs of coffee and dairy products together are so significant of a cost that Starbucks also forms strategic partnerships with other retailers to mitigate the costs of these essential ingredients by completing bulk buys of products (Fridell, 2009). Starbucks has transformed supply chain potential risk into branding advantages however through the use of their Fair Trade Initiative, which seeks to pay growers the fair market value for their coffee crops.

In summary, Starbucks is navigating through the competitive threats, threats of substitution, formidable strength of consumers due to their direct impact on profitability from their loyalty, and the impact of suppliers on the cost structures of their entire industry. Starbucks has chosen to take potential risks in the areas of Corporate Social Responsibility (CSR) for example in the areas of supply chains and Fair Trade and turn it into part of their unique value position and uniqueness as well (Fridell, 2009).

Implications on Marketing Plans and Change Management

Starbucks’ initial approach of creating a highly cannibalized sales model globally was brought back to a more realistic scale in the current recession. The concept of having each store compete with a surrounding one on service and experience delivered as measured by customer satisfaction scores however did drive smaller competitors out of the market over time.

In analyzing how the core forces as captured in the Five Forces Model are redefining the Starbucks marketing strategy, starting with the force of Buyer Power (or customers) it is clear that the company’s rapid and complete adoption of social networking including the development and continual use of Twitter, Facebook and the website My Starbucks Idea all illustrate how committed and passionate the company is about putting the customer at the center of their marketing, retailing and service strategies. The active role of customers on these social networking platforms is also creating a groundswell effect in terms of the company’s brand being seen more as one willing to listen and improve, less on being one-dimensional or dictatorial in their approach to defining their services and product direction (Bernoff, Li, 2008).

The $7.6M investment in R&D on a consistent yearly basis also shows how attuned Starbucks management is to the development of substitute products and the corresponding need to create exceptional products. What Starbucks continues to work toward is a continual improvement in their internal knowledge sharing processes as they seek to create an e-learning network to make knowledge a competitive differentiator as well (Marahao, Carrieri, 2007).

The managing of supply chains not as a separate entity, which is the strategic error Nike made and paid a high price for lack of Corporate Social Responsibility (CSR) as a result, but as an integral part of their strategy also differentiates Starbucks from its many competitors. Starbucks has successfully taken their CSR strategies as they relate to supplier and transformed their value proposition globally as a result. As the costs of suppliers also is re-ordering the value chain (Porter, 1986) of this industry, Starbucks has also redefined partnerships and alliances for over a decade to find shared cost reduction strategies (Sergil, 1998).

What is unique about Starbuck’s approach to change is that strategically all factors have become once again set on the customer though the use of social networks to listen to them and create more customer-based strategies. Aligning supply chain strategies, R&D initiatives, and new approaches to delivering customer experiences all have led to major change in the company’s operating approach in the last five years as a result. As with any company that makes the transition from one significant change to the next, the company’s CEO Richard Schultz has again taken leadership of the company to ensure the synchronization of all these systems, processes and strategies are in alignment with each other. The approach Starbucks has of systematically changing their strategies yet ensure synchronization across all systems provides an example of how agile companies need to be to survive in the turbulent economies times of today.

Appendix a Starbucks’ Corporation Ratio Analysis

Starbucks Corporation Ratio Analysis

Profitability Ratios

9/28/2008

9/30/2007

10/1/2006

10/2/2005

10/3/2004

ROA % (Net)

5.74

13.8

14.25

14.49

12.73

ROE % (Net)

13.25

29.89

26.2

21.66

16.87

ROI % (Operating)

10.72

29.29

30.26

29.03

23.61

EBITDA Margin %

9.67

15.3

15.76

17.22

16.62

Calculated Tax Rate %

41.63

40.46

39.98

41.96

41.25

Revenue per Employee

59,156

54,868

53,555

55,537

53,864

Liquidity Indicators

Quick Ratio

0.27

0.26

0.28

0.3

0.56

Current Ratio

0.8

0.79

0.79

0.99

1.75

Net Current Assets % TA

-7.79

-8.59

-9.16

-0.5

17.59

Debt Management

LT Debt to Equity

0.22

0.24

0

0

0

Total Debt to Equity

0.51

0.55

0.32

0.13

0

Interest Coverage

7.31

91.96

71.78

Asset Management

Total Asset Turnover

1.89

1.93

1.97

1.87

1.72

Receivables Turnover

33.73

36.85

37.63

38.59

40.9

Inventory Turnover

15.04

14.21

13.21

13.18

13.61

Accounts Payable Turnover

29.09

25.79

27.79

30.39

28.28

Accrued Expenses Turnover

15.01

13.3

12.85

12.59

12.6

Property Plant & Equip Turnover

3.56

3.64

3.78

3.86

3.65

Cash & Equivalents Turnover

37.79

31.78

32.11

27.01

20.83

References

Bernoff, J., & Li, C.. (2008). Harnessing the Power of the Oh-So-Social Web. MIT Sloan Management Review, 49(3), 36-42.

Chris Churchill. (15 July 2008). Starbucks competitors get jitters: Local coffeehouses, facing woes of their own, cast wary eye on chain’s recent closings. McClatchy – Tribune Business News

Fridell, G. (2009). The Co-Operative and the Corporation: Competing Visions of the Future of Fair Trade. Journal of Business Ethics: Supplement, 86, 81-95.

Burt Helm. (2007, April). SAVING STARBUCKS’ SOUL: Chairman Howard Schultz is on a mission to take his company back to its roots. Oh, yeah — he also wants to triple sales in five years. Business Week,(4029), 56.

Carolina Marahao, & Alexandre de Padua Carrieri. (2007). Tribal Knowledge: Business Wisdom Brewed from the Grounds of Starbucks Corporate Culture. Corporate Reputation Review, 10(3), 213-215.

Porter, Michael E. (2008, January). The Five Competitive Forces That Shape Strategy. Harvard Business Review: Special HBS Centennial Issue, 86(1), 78-93.

Porter, Michael E. (1986). Changing Patterns of International Competition.

California Management Review, 28(2), 9.

Marius Pretorius. (2008). When Porter’s generic strategies are not enough: complementary strategies for turnaround situations. The Journal of Business Strategy, 29(6), 19-28.

Jeneanne Rae. (2006, November). The Importance of Great Customer Experiences… Business Week,(4011), 32. Retrieved September 15, 2009, from ABI/INFORM Global. (Document ID: 1166573331).

Larraine Segil. (1998). Strategic alliances for the 21st century. Strategy & Leadership, 26(4), 12-16.

Verhoef, P., Lemon, K., Parasuraman, a., Roggeveen, a., Tsiros, M., & Schlesinger, L. (2009). Customer Experience Creation: Determinants, Dynamics and Management Strategies. Journal of Retailing: Enhancing the Retail Customer Experience, 85(1), 31-41.

Figure 1:

Porters’ Five Forces Model

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