Coffee and Starbuck Essay

Summarize the overall strategy of Starbucks Management in its effort to create and develop a new concept and a rapidly expanding company. The overall goal of Starbucks Management was to create an American version of the Italian coffee bars that Howard Schultz had experienced first-hand in Milan. He believed that Starbucks should function as an important part of the community, as a meeting place for its customers. He wanted Starbucks to become an experience that would differentiate itself from its competitors. One of their key strategies in meeting this goal is a focus on customer service in order to create an experience for its consumers. Another one of their strategies is to ignite their emotional attachment with consumers. They also have a commitment to improving their business through better training, tools, and products and to give attention to store-level economics and operating efficiency. All of these are prongs to their strategy that will allow Starbucks management to turn Starbucks into a location where people don’t just go to grab coffee, but to experience the atmosphere of an Italian coffee shop. Another prong to their strategy is to offer many different products and to distribute them among a variety of distribution methods. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that Starbucks is employing? There are five generic competitive strategies that can be employed and they are low-cost provider strategy, broad differentiation strategy, focused low-cost strategy, focused differentiation strategy, and best-cost provider strategy. The strategy that Starbucks uses is broad differentiation where they seek to differentiate their product offerings from rivals’ with attributes that will appeal to a large variety of consumers. The key market characteristic for the strategy of differentiation to work is that buyers’ needs and preferences are very diverse and cannot be satisfied with a standardized product offering. This is an evident characteristic of the market because consumers all have different preferences on the way they like their coffee. Which is the reason why Starbucks offers many different product options like lattes, skinny lattes, coffee, iced drinks, blended drinks, etc. They also offer fruit cups, water, and bakery items to provide even more options for their consumers. If a differentiation strategy is successfully implemented the firm will be able to do one of the following: command a premium price for its products, increase unit sales, and/or gain buyer loyalty to its brand. Starbucks has some of the highest prices for the type of products they offer and people tend to be extremely loyal to whatever coffee they are used to purchasing, because they trust the quality. Methods to enhance differentiation 1. Create superior product features, design, and performance Starbucks has a superior knowledge of coffee and a commitment to providing customers with quality coffees. Providing top-quality, fresh-roasted whole-bean coffee was the company’s differentiating feature and a core value since the beginning of its founding. Couches, fireplaces, newspapers, drive-through windows, kiosks in supermarkets and other public places were added to locations depending on what would add value to their consumers. Due to their focus on providing a different experience depending on the location of the store, their international strategy is a multi-domestic approach. The core characteristics of each new store was based on local materials and craftsmanship, a focus on reused and recycled materials and exposure of structural integrity and authentic roots. Most important of all they believed that coffee should be central and that distractions should be removed. They believed that the combination of all these elements should tell a story that would engage the consumer’s five senses and provide them with flexibility to meet the needs of the many different consumers that would be attracted to Starbucks. 2. Improving customer service or adding additional features When Howard Schultz first became part of the company he realized that one key problem Starbucks was having was that first-time consumers often felt uneasy about their absence of knowledge about high-quality coffee. An additional problem was that the employees came off as arrogant and unapproachable. He then worked with employees to teach them about friendly customer service and created a pamphlet to teach new customers about coffee. He also began to offer part-time employees health insurance and a stock option plan for all employees, because he believed that if a company treated their employees well, then they would in turn treat their consumers well. The additional features that Starbucks offers are fireplaces, couches, music, Wi-Fi access, ability to use paid sites and services like Wall Street Journal’s site, exclusive content and previews, free downloads, local community news, and activities. 3. Pursuing production R&D activities Starbucks is constantly brewing new flavors and blends to offer their consumers a variety of coffee to try. Flavors are rotated daily or weekly to offer constant variety. They also test new product offerings like Frappuccino’s, Lattes, Skinny Lattes, and seasonal drinks. 4. Striving for innovation and technological advances One way that Starbucks was able to constantly strive for innovation was by controlling the cost of opening and renovating stores by centralizing buying, developing standard contracts and fixed fees for certain items, and consolidating work under those contractors who displayed good cost-control practices. Starbucks retail operations group outlined the minimum amount of equipment each store would need. This meant that standard items could be ordered from vendors in volume at 20 to 30 percent discounts. The items would then be delivered to the site from a warehouse or from the vendor. A technological advance was that they used computer software to build store layouts that would calculate costs as the design progressed. This cut costs by a significant amount and shortened the process of opening a store to 18 weeks. 5. Increasing intensity of marketing and sales activities Originally, Starbucks didn’t spend a lot of money on advertising, because they relied mostly on word-of-mouth. In 2008 McDonald’s stepped up their advertising to highlight their McCafe coffee drinks. In order to counter this Starbucks undertook the largest advertising campaign ever. 6. Seeking out high-quality inputs Starbucks promotes environmentally sustainable practices in coffee cultivation methods and have specific guidelines they follow called Coffee and Farmer Equity Practices that help farmers to grow high quality coffees in environmentally beneficial ways. In 2000 they began purchasing their coffee organically and a growing percentage of their coffees were grown organically as well as Fair Trade Certified. 7. Improving employee skill, knowledge, and experience Starbucks has a commitment to training their employees so that they are better able to serve their customers. All partners and baristas receive at least 24 hours of training in their first two to four weeks on topics such as coffee history, drink preparation, coffee knowledge, customer service (for a total of 4 hours), and retail skills. Baristas in particular are required to learn how to grind beans, steam milk, pull perfect shots of espresso, memorize recipes, practicing how to mix drinks, and how to customize drinks. Sessions also include how to operate the cash register, clean the milk wand, explain the Italian drink names, and making eye contact with customers. Management trainees are required to attend classes for 8-12 weeks and learn about store operations, practices, and procedures. When a new store is opened a Star Team of experienced employees are sent to make sure everything runs smoothly. From time to time, Starbucks conducts special training programs, including a coffee masters program, leadership training program, and career programs for partners in all types of jobs. When does a differentiation strategy work best? A differentiation strategy works best when buyer needs and uses of the product are diverse, there are many ways to differentiate the product or service that have value to buyers, few rival firms are following a comparable differentiation approach, and technological change is fast paced and competition revolves around rapidly evolving product features. Starbucks’ actions to differentiate their product line They have expanded their product offerings along many different distribution channels by capitalizing on their growing brand name and awareness. First they were able to market their product to restaurants, airlines, hotels, universities, hospitals, business offices, country clubs, and select retailers. United Airlines, Hyatt, Hilton, Sheraton, Radisson, Westin hotels, and Wells Fargo all began to serve Starbucks coffee. A joint venture with PepsiCo came with the sale of a bottled version of the Frappucino drink and Starbucks Doubleshot espresso drinks. In 2008, they partnered with Suntory to sell ready-to-drink Doubleshot drinks in Japan. In 2010 a partnership with Arla Foods spread Doubleshot products and Starbucks chilled cup coffees into retail stores in the UK. A 1995 partnership with Dryers created a new line of coffee ice cream under Starbucks names that was later disbanded in 2008. At this time the rights to manufacture, market, and distribute Starbucks ice cream was given to Unilever. In 1998 Kraft Foods began marketing and distributing whole bean and ground coffee to supermarkets in the US. Tazo Tea was acquired by Starbucks in 1999 and in 2005 they acquired Ethos Water. A partnership with Jim Beam Brands created Starbucks Coffee Liqueur in 2004 and Starbucks Cream Liqueur in 2005. In order to offer healthier options they began offering skinny lattes, banana walnut bread, fruit cups, yogurt parfaits, a farmer’s salad, and smoothies in 2008. Also in 2008, Starbucks responded to customer’s wishes to have a blend of coffee that was always in stores. They created the Pike Place Roast in order to satisfy these customers. 2009 saw the introduction of VIA instant coffee. In 2009 the retail sales mix of Starbucks was 76% beverages, 18% food items, 3 percent coffee-making equipment and other merchandise, and 3% whole bean coffees. What are the key policies, practices, business principles, and procedures that underlie how Howard Schultz and Starbucks’ management have implemented and executed the company’s strategy? Key Policies, Practices, Business Principles, and Procedures The key policies that have been implemented can be broken down into five groups. First is how the company goes about expanding the number of Starbucks stores. The second is their international expansion practices. The third group is their staff training. The fourth is their principles towards ethical business practices. Fifth, is their coffee roasting practices. Store Expansion Starbucks management’s approach to store expansion is using a hub city approach. After a suitable demographic area is chosen Starbucks begins to open up stores in a large city that serves as its hub. After about 20 stores are opened in this hub city, they will then move on to the surrounding areas that are the spokes. This expansion strategy serves to create buzz and brand recognition for the company in an area that has a high amount of foot traffic before moving into a location that has less customer traffic. When a new area was selected for expansion a group of professionals were sent to facilitate the opening. Starbucks also had zone vice presidents who would oversee the expansion process and instill the culture of Starbucks in the new stores. International Expansion When expanding internationally Starbucks has two options; they either open company-owned and operated stores or license to a company that has a good reputation and the knowledge of retailing in that area. Starbucks prefers to license, rather than franchise because licensing provides more assurance of quality control. When they move into foreign markets one of their practices is to use a partner or license to help recruit individuals for employees, set up relationships with suppliers, find store locations, and learn how to cater to local market conditions. For stores that were licensed Starbucks would receive a license fee and a royalty on sales. Companies that were licensed to supply Starbucks coffee were required to follow their detailed operating procedures. Not only that, but managers and employees were required to attend the same training as employees at company-owned stores. Staff Training As mentioned previously, employees are put through an extensive amount of training to learn daily practices and how to treat customers. They are put through this training because customer service is so integral to their organization. Some of the things that baristas learn in their 24 hours of training are coffee history, drink preparation, coffee knowledge, customer service, retail skills, and beverage preparation. Beverage preparation includes grinding the beans, steaming milk, pulling a perfect shot of espresso, memorizing the recipes, practicing the drinks, and learning how to customize drinks. Finally, partners were trained on cash register operations, how to clean the milk wand, how to explain Italian drink names, how to sell espresso machines, making eye contact, interacting with consumers, and taking responsibility for the cleanliness of the store. Not only that but they had many rules that needed to be learned as well such as: milk needs to be steamed to 150 degrees Fahrenheit but not more than 170 degrees, an espresso shot not pulled within 23 seconds needs to be thrown out, coffee can’t sit in the pot more than 20 minutes, and disgruntled customers were given a coupon for a free drink. Managers were required to go even more in depth with their training. Ethical Business Principles Starbucks purchases products that are Fair Trade Certified, meaning that farmers make a fair amount of money for their products. They are very involved in Corporate Social Responsibility and take a number of measures to reduce, reuse, and recycle. They are also committed to purchasing from companies that use environmentally sustainable growing practices. Coffee Roasting Practices Coffee recipes are put together by the coffee department once all components have been tested. In order to be sure of consistency computerized roasters are used. Trained personnel are required to monitor the process by using hearing and their sense of smell to check when the beans are perfectly done. There are extremely exacting standards that must be met and the color of the beans is tested in a blood-cell analyzer and if it doesn’t meet the requirements the batch is discarded. Directly after roasting and cooling coffee is vacuum-sealed into bags that are guaranteed to preserve freshness for 26 weeks. However, policy says that after three months they need to be used. Once opened the shelf life is seven days. What â€Å"values† does Starbucks have? How well do they connect to the strategy and to the manner in which the company conducts its business? Are they successful in implementing to them? The values that Starbucks consider important are included in their mission statement and those are: 1) Coffee: They are committed to providing their consumers with top-quality coffee that is ethically sourced, and to improve the lives of the people who grow the beans. They do this through a variety of methods. First is their Coffee and Farmer Equity Practices (C. A. F. E Practices). These practices specify product quality, that the price received by farmers/growers is fair, that safe and humane working conditions are being used, and that the methods of growing are environmentally responsible. Second, they do not add artificial flavorings to their coffee beans. Third, they have Farmer Support Centers in Costa Rica and Rwanda. These support centers were staffed with agronomists and experts on environmentally responsible coffee growing methods and worked with coffee farming communities to promote best practices in coffee production They also worked to improve coffee quality and production yields. 2) Partners: In order to better care for their employees Starbucks has a health care plan available for all employees, a stock purchase plan, employee training, and employee recognition. Some of their employee recognition awards include Coffee Master awards, Certified Barista awards, Spirit of Starbucks awards, Manager of the Quarter, Green Apron awards, Green Bean awards, and Bravo! Awards, 3) Customers: They value connecting with customers and uplifting the lives of consumers by providing the perfectly made beverage and going the extra mile for their customers. Employees are trained to take heroic measures to make customers happy. 4) Stores: Starbucks management’s goal was to create the stores to be a haven where customers belong and meet with friends. They do this by creating a store ambience, having interesting music playing, leather couches to sit and read newspapers in, and they make sure that nothing overpowers the smell of coffee. 5) Neighborhood: Their stores are part of its community and to be a force of positive good in the area. One way they do this is by using local materials and craftsmanship. They are also extremely involved in Corporate Social Responsibility. The commitment to do the right thing has been a significant part of how Starbucks operates as a company ever since Schultz became CEO. Starbucks has been named to Corporate Responsibility Magazine’s list of â€Å"The 100 Best Corporate Citizens† for the 10th time in 2010. 6) Shareholders: Starbucks is committed to getting all of the above values right so that they can help everyone that is involved and affected by Starbucks thrive. What is your evaluation of Starbucks social responsibility strategy? How much does it help to create their public image? Starbucks CSR strategy has four main parts which are: 1) Ethical sourcing of products: They do this through their C. A. F. E Practices, purchasing Fair Trade Certified products, and buying from manufacturers that have a commitment to environmental and social responsibility. 2) Community involvement: Starbucks has several organizations to foster community involvement. First, is the Starbucks Youth Action Grants which involves young people in community involvement projects. Second, is their program to give medicine to people suffering from HIV in Africa. Third, is the Ethos Water Fund where they donate 5 cents every time somebody purchases a bottle of Ethos Water. Fourth, they donate money to the Starbucks Foundation which was the fund that was started in 1997 to handle all the Starbucks’ philanthropic actions. 3) Environmental Stewardship: In order to achieve this goal they have several methods. First, they focus on increasing recycling and reducing waste which they do by giving discounts to people who bring in their own mugs, coffee grounds are donated for use as a soil amendment, they take part in Earth Day activities, they purchase paper products with recycled content and unbleached fiber, and they encourage their suppliers to provide energy-efficient products and eliminate unnecessary packaging. They also have commitments to be more energy efficient, use renewable energy sources, conserve water resources, use green facilities, using environmentally friendly building materials and energy-efficient designs. They also have plans to achieve LEED certification globally. In 2009 they became part of the Businesses for Innovative Climate Change and Energy Policy coalition. They have also collaborated with the Earthwatch Institute and work on replanting rain forests, mapping water resources, and biodiversity indicators, and sharing sustainable agriculture practices with coffee growers. 4) Farmer loans: They provide funding to organizations that make loans to coffee growers. Their goal for 2015 is to donate $20 million dollars to these funds. They have also committed money to hurricane Rita and Katrina victims, as well as to help the devastation after the earthquake in Haiti. Having a strong CSR campaign adds to the value of Starbucks’ products if consumers know that they are involved in these activities. It lets consumers know that part of the money they are spending is going to a good cause. By getting on the Corporate Responsibility Magazine’s list of â€Å"The 100 Best Corporate Citizens† for the 10th time in 2010, it increases the knowledge that people have about their CSR strategy. Compare the US and International share of yearly revenue, revenue growth, and operating income/revenue. What do these ratios tell you? What is your overall assessment of Starbucks’ financial performance during fiscal years 2005-2009? Explain the performance of Starbucks stock. Exhibit 1 Comparison of Starbucks’ Financial Performance in the US and Internationally| | | 9/27/2009| 9/27/2008| 9/30/2007| 10/1/2006| 10/2/2005| Yearly Revenue ($ millions)| | | | | | | United States| $ 6,572. 10 | $ 6,997. 70 | $ 6,590. 20 | $ 5,495. 20 | $ 4,359. 50 | | International| $ 1,608. 00 | $ 1,774. 20 | $ 1,437. 40 | $ 1,087. 90 | $ 852. 50 | Revenue Growth ($ millions)| | | | | | | United States| -6. 08%| 6. 18%| 19. 93%| 26. 05%| | | International| -9. 37%| 23. 43%| 32. 13%| 27. 61%| | Operating Income/Revenue ($ millions)| | | | | | | United States| $ 531. 80 | $ 454. 20 | $ 1,005. 20 | $ 955. 20 | $ 818. 50 | | International | $ 92. 90 | $ 110. 00 | $ 137. 70 | $ 108. 50 | $ 82. 30 | These ratios tell us that overall they have been increasing their revenue growth by significant percentages of an average of 20% internationally and 12% domestically. Domestically the amount of revenue growth per year slowed down in 2008 and went negative in 2009. Revenue growth also went negative in 2008 internationally. This makes sense because 2008 was the beginning of the economic downturn which affected the company’s bottom line. Operating income has fluctuated quite a bit since 2005 and since its peak in 2007 ($1,0005. 20 million) has decreased significantly to $531. 80 million. Internationally it has remained steadier at an average of $106. 28 million. Again these numbers make sense because it was in 2008-2009 that the economic downturn occurred and Schultz instituted strategic initiatives and revamped strategy execution efforts to fix these financial problems. One reason that the economic downturn affected Starbucks’ bottom line badly is because it was considered a treat to go to Starbucks and to get coffee that wasn’t brewed at the home. Less people were indulging in coffee by the cup. In 2006 and 2007 Starbucks reached its peak growth in the period displayed in exhibit 1. This is represented in the stock chart because it is also when their stock performance reached its peak at 40. The lowest point on the stock chart was in 2008 which makes sense because this is when the economic downturn occurred so many people were selling stocks. In 2008-2009 Schultz’s measures to institute strategic initiatives and revamp strategy execution efforts began and clearly worked because in the period of time from 2008-2010 stocks returned to almost 30. What are the key elements and your evaluation of Howard Schultz’s transformation agenda for Starbucks during 2008-2010? What do you think of the letters shown on page C-364 and C-365? Has Schultz done a good job since his return as Starbucks’ CEO? Why or why not? Elements of the Transformation Agenda Howard Schultz’s transformation agenda during 2008-2010 had several key elements. First, he planned on slowing new store openings to 73 internationally. Second, 900 underperformed company-owned stores were closed in the United States. The goal of this action was to raise sales and traffic at nearby sales. Around 75% of these stores that were considered underperforming were within three miles of an existing store which shows that their strategy of having a Starbucks everywhere was cannibalizing their sales. The third element of the transformation agenda was raising the projected return on capital requirements for proposed new store locations. This is a way for Schultz to be more particular about new store placement and to have a better chance of making a significant amount of profit and not losing traffic to existing stores. Fourth, he planned on revamping the company’s locations in Australia with a focus on Brisbane, Melbourne, and Sydney as the hub cities. He planned on closing 61 under-performing locations in order to do this. Fifth, it was important to Schultz that there be an emphasis on developing new store designs in order to promote a refreshed customer experience. In order to do this the character of each store would be a reflection of the area it was in to make the customers feel more at home and to make Starbucks the center of that community. Sixth, customer experience would be heightened through a variety of methods. The first method was by removing warmed sandwiches from the menu, because it inhibited the aroma from the coffee. Second, high-quality baked goods and pastries would be offered at the store along with new menu items for healthy eating on the go. For example, fruit cups, skinny lattes, yogurt parfaits, salads, smoothies, and healthier bakery selections were all a result of this step in Schultz’s transformation agenda. The seventh part of the agenda was to create a program to share best practices in stores globally, this would promote quality control and improve customer service, which was one of the things that Schultz had found lacking when he became CEO again. Eighth, Schultz thought it was important to provide resources and tools for store employees such as laptops and internet-based software for scheduling. Ninth, there were cost-containment initiatives put in place in order to improve the bottom line that included a reduction of 1,000 people in staffing. Finally, the last part of the agenda was to renew the attention placed on employee training in order to reignite the enthusiasm to please customers that is vital to the mission of Starbucks. Evaluation The goal for 40,000 stores worldwide as a long-term objective and the rapid expansion that Jim Donald began led to a decrease in customer traffic in the US stores, new store openings that continued at a rate of 6 per day worldwide, and the emphasis on increased store operations efficiency put financial strain on the company and led to a decrease in customer service. Good customer service is one of the cornerstone values of Starbucks and was a central idea during Schultz’ leadership. Schultz’ return to CEO and his strategic initiatives mentioned above will help to return Starbucks to the values it originally held as very important and to return it to profitability by slowing down on expansion to focus more on the three main themes Schultz saw as important to his strategy. These themes are: strengthening the core, elevating the experience, and investing and growing. Before he can focus on growing the company, they need to have a strong base of employees and a focus on the experience that Starbucks is meant to provide its consumers. Letters from Schultz The letters that are shown on page C-364 and C-365 of the case show that Schultz is dedicated to his shareholders, which is one of the values in their mission statement. He is being extremely open and upfront the concerns of shareholders and about the actions that will be taken to address those issues. The first letter is addressed to customers and he explains that he has come back to Starbucks as CEO in order to ensure that the customers receive the experience that he believes Starbucks is known for. This letter shows that he truly cares about the thoughts and concerns of consumers. The second letter is to the employees of Starbucks. In this letter Schultz addresses them as partners in the path to revitalizing Starbucks’ mission. He even says, â€Å"I am proud to be your partner†¦Ã¢â‚¬  By treating his employees like this he is able to foster accountability for the actions that everybody can take in helping to turn around Starbucks to what Schultz’ vision for it is. Evaluation of Schultz’ work. Schultz has done a good job by creating strategic initiatives in order to return Starbucks to where he thinks the company should be. His vision includes becoming the authority on coffee, engaging and inspiring Starbucks’ partners, igniting the emotional attachment with customers, expanding global presence and making each store the neighborhood’s heart, being a leader in ethical sourcing and environmental impact, creating innovative growth platforms, and delivering a sustainable economic model. Every one of these visions is addressed in some way in his agenda, which shows he has a clear idea of where the company should go and how to get it there. In 2008-2009 the company experiences five quarters of deteriorating sales, but from 2009-2010 had five quarters of improving sales, which shows that Schultz’ transformation agenda has been working. What issues confront the company as of mid-2010? What should Starbucks’ management be worried about? What are the challenges in expanding internationally? Issues as of mid-2010. 1) Oversaturation of the market: With the â€Å"A Starbucks Everywhere† approach and the rapid expansion steps taken by Donald, there was a decrease in customer traffic at the stores, resulting in a loss of profit. 2) Lack of emphasis on customer relationships: The emphasis on increased efficiency in store operations led to a decrease in good customer service. 3) Drifting away from the original values of Starbucks: Starbucks was built with an emphasis on high-quality coffee, good customer service, and a commitment to creating an experience for customers. However, when Schultz became CEO again he noted that this was lacking. 4) Offering high-quality products: As Starbucks moves into new locations in order to draw attention away from local popular spots they will need to offer a product that is of high enough quality to keep consumers coming back. 5) Differentiation: Again, as they move into new markets they will need to do significant research to find out what those consumer’s value. They need to be able to give it to them in order to achieve their goal of being the heart of the neighborhood. 6) Coffee prices: Coffee prices fluctuate significantly due to weather, economic, and political conditions in the countries where they are grown. What should management be worried about? Management should be worried about offering high-quality products. If they cannot prove that their product is better due to quality or differentiating features then locations that sell coffee and consumers are already loyal, they will have issues drawing consumers away. However, Starbucks does have an extremely strong brand image and hype associated with their name, which is an asset for them in entering new markets. International Challenges Some challenges that Starbucks will face internationally are: 1) Adapting their stores to fit the location they are in 2) Creating partnerships and licensing agreements with reputable companies to offer their products abroad 3) Regulations on foreign businesses moving into their country 4) Having enough control over the quality in the international stores that are licensed. 5) Higher production costs Starbucks has chosen to follow a multi-domestic approach to international expansion, meaning that they customize their product offerings to match the tastes and preferences of local buyers. The main challenge that Starbucks will face in entering international markets is knowing what that group of people wants and prefers. Another problem is that they will need to make partnerships and licensing agreements with reputable companies in order to be sure that the culture of Starbucks is continued to their new stores. Finally, they will have the issue with tailoring their stores to fit the environment they are in, because they will be unable to use a set design which could raise production costs. What recommendation would you make to Howard Schultz to sustain the company’s growth and support continued strong financial performance in the years ahead? Consider both the US and International strategies. Recommendations * Coordinate with suppliers to address consumers’ needs better: By coordinati.