1. What was Starbucks Strategy? That is, what are they really selling? In the mind of Howard Schultz, the current CEO and founder of Starbucks, the intended Starbucks Strategy is to create the “Starbucks Experience” (the Experience) for their loyal customer base, both in the North American markets as well as countries around the world.
The Experience focuses on providing a much consumed Italian style coffee in stores with an atmosphere which encourages long visits by providing an aesthetically pleasing upscale environment often reminiscent of the local community, amenities such as WIFI connection, the offering of snacks to complement their main product, and store placement in shopping centers, book stores, and even airports. Starbucks was initially able to accomplish this strategy with few competitors by distinguishing its product as high quality and the placement of its stores for the convenience of consumers.
The nature of Starbucks operations also contributed to this experience. The employees responsible for customer service are referred to as partners versus staff and received wages and benefits above those that could be found in similar customer service jobs fostering a sense of pride and ownership in the services they provide to Starbucks customers. Also, the company prides itself on corporate and social responsibility by utilizing recycled and environment friendly materials, participating in local community charities and fair trade practices.
This sense of responsibility is passed on to customers who are able to feel that they are doing their part by supporting/frequenting a socially conscious business. An emergent strategy that succeeded Mr. Shultz’s departure from Starbucks in 2000 was rapid expansion which included domestic store expansion, international store expansion, and product line expansion. By 2007, Starbucks had 15,700 stores in 37 countries, 115,000 employees and market capitalization of $25 billion. 2. What three or four factors distinguish Starbucks as a company and contributed to its initial growth?
The Starbuck’s fundamental business is lucrative. The return on investment per cup of coffee approximates 300%. Management used the initial strategic foundation of creating the Experience as a decision support tool to duplicate its success multiple times in expansion in North American as well as abroad. There was and continues to be virtually no competition offering the same types of products and environment found with Starbucks coffee. Although the pricing of the products tended to be higher than others in the coffee drinks market, Starbucks continues to secure the affluent customer-base it initially captivated.
The boundaries of the Experience also guided the design and decoration as well as the placement of its stores. Typically the store design would emulate its locality using distinctive decor and elements of the culture from the area. Decisions about store placement within an area were made consistently such that customers could depend on where a store would typically be found. Although the word of Starbucks spread quickly, to stumble upon a store front or to have a store come to your community was considered a treat. The store spoke for itself.
The formula for effective development and implementation of store openings were bound to the initial strategy. 3. What are the main problems that emerged in 2007 and 2008? In considering this question, think about their expansion and branding strategies. When the business environment became turbulent, Starbucks strategy did not adapt to the changing external circumstances. The recession hitting North America caused many loyal customers to cut back on discretionary spending. Increase in price of coffee per cup did not go well with customers. This resulted in revenue decline.
Changes in corporate philosophy allowed expansion to occur through the growth of debt instead of the reinvestment of profits or reaching out to stockholders. Market capitalization fell from $25 billion to $ 13 billion. Share prices fell by about 50%. Though total assets were growing steadily, working capital deficit emerged due to short-term and long-term borrowings increasing from $281 million in 2005 to $1. 261 billion in 2007. Emerging threats from McDonalds, Dunkin Donuts and Peet’s Coffee & Tea, and their generally lower pricing grew.
In addition, they had diversified to the point their unique brand was no longer considered exclusive. Finally, the licensing of stores in lieu of company operated stores in some of the international locations caused a lack of standardization. Licensed stores were much more common in the international market. This trend prevented the formula for effective development and implementation of store openings to be consistent with the Experience. As a result of the problems identified above, Starbucks announced 600 stores closing by July 1, 2008.
In an effort to turnaround the company, Howard Schultz, reassumed the mantle in 2008 after eight years of hiatus. The corporate strategy changed from store numbers and returned to store quality. In a letter to employees, he wrote to shift focus away from bureaucracy and back to customers. Consumer-oriented business strategy is the key. By definition, ubiquity is the opposite of exclusivity. By maintaining ubiquity in all desirable locations, customer service must be exclusive. This will reaffirm the brand and restore customer confidence.
The Retail of prepackaged coffee, branch out beyond coffee, cut down on long waits at counters, promotion offers, frequent user cards as an incentive to loyal customers are a just a few of the changes that have been implemented to encourage consumers. International growth particularly in China is promising. Other areas of global development are Brazil, India, and Russia. These changes are designed to reestablish emotional connection that Starbucks built in 1990s and early years of 2000.