Title of the Work Student’s Name Institute Affiliation Professor’s Name Course Date INTRODUCTION Starbucks Corporation is a model of extraordinary business success popular for offering services such as sourcing


Title of the Work

Student’s Name

Institute Affiliation

Professor’s Name

Course

Date

INTRODUCTION

Starbucks Corporation is a model of extraordinary business success popular for offering services such as sourcing, roasting and serving coffee of high quality as well as improving the experience of the consumers, its growth appeared a guarantee until it faced financial crisis at the end of 2010 fiscal year. It however transformed slowly for three years through implementation of multi-brand business and multi-channel models. Similarly, a new era was achieved at Starbucks Corporation through production of new products that took the company back to the original coffee business, with its purpose being evaluation of various business portfolio, strengths and strategies outlined below:

• Discussing the corporate-level strategy of the company.
• Product development evaluation strategy as well as its benefits.
• Starbucks international performance in its business and strategies that can be initiated.
• Benefits of current strategies at Starbucks and the need for advanced ones.

ANALYSIS

Starbucks Corporation needed to increase its value by use of corporate level strategy immediately after the 2010 financial crisis. Most of the developments however happened outside its iconic coffee shops. The table below illustrates a list of product brands at the company with the sales from each one of them.

Product/Brand Starbucks Coffee Cafes Branded Stores Owned by Starbucks Grocery and Other Channels
(CPG)
Juices – Evolution Fresh Ready-to-drink in 2,200 Starbucks stores Fresh in 4 Evolution Fresh stores Ready-to-drink in 8,000 supermarket and convenience stores
Baked Goods – Bay Bread Warm display in 3,500 Starbucks stores Fresh in 19 La Boulange Café & Bakeries
Fruit and Nut Bars – Evolution Harvest Packaged food item in Starbucks stores Whole Foods Market
Yogurt Parfaits – Danone Exclusive in Starbucks stores (2014) Grocery stores (2015)
Breakfast Sandwiches Served hot in Starbucks stores
Bagged Teas – Tazo Bagged and single-serve in Starbucks stores Bagged and ready-to-drink in grocery/related stores
Exclusive organic bagged flavors at Whole Foods
Loose-Leaf Teas – Teavana Loose-leaf, packaged, and shaken iced in Starbucks stores (2014)
Oprah Chai Tea Loose-leaf, packaged, and Oprah Chai Tea in 300 Teavana shopping mall stores
3 flagship stand-alone Teavana shops Packaged loose-leaf
Coffees – Seattle’s Best Coffee Defunct Borders bookstores Ground and whole bean packages in 50,000 partnership distribution points
Packaged varieties in grocery and retail stores
Carbonated Beverages – Fizzio Handcrafted caffeine-free cold drink in select U.S. and China markets
1/3 of Starbucks stores (2014)
Energy Drinks – Starbucks Refreshers Iced fruity green coffee extract drink in Starbucks stores Ready-to-make powdered
Canned carbonated flavors
Alcoholic Beverages – Starbucks Evenings Wine and beer in 23 select stores Wine and beer in 1 non-branded Seattle location
cont.

cont.
Coffee Starbucks Coffee
Cafes Branded Stores Grocery and Other Channels (CPG)
Light Roast, Seasonal, and Reserve Blends – Starbucks Lighter roasts, seasonals, and macchiatos in Starbucks stores
Exotic and limited blends in select stores Ready-to-drink frappuccinos and iced coffees
Ground and whole bean packaged varieties in grocery and retail stores
Instant – Starbucks’ VIA Ready Brew Packaged product sold in Starbucks stores Ready brew instant
Other retail
Single-Cup Brewing – Clover Reserve blends in 500 coffeehouse locations
(1,000 locations by 2014)
Single-Serve Pod Drinks – Verisimo Packaged product sold in Starbucks stores Other retail

Starbucks’ backward integration into the food product supply chain can enhance the company’s market power over rivals which can be achieved through among them, lowering operations, marketing and sourcing costs as well as improvement of the marketplace. Vertically integrated firms have access to complementary information and knowledge that can improve product quality and foster new technologies. Market power is also created through strong ties across productive assets for which no market prices exist.

The company entered the consumer packaged goods (CPG) business with the sale of packaged Starbucks and Seattle’s Best Coffee whole beans and ground coffee at supermarkets. Now, its CPG business includes premium Tazo teas, Starbucks and Tazo branded single-serve products, ready-to-drink beverages (such as Starbucks Refreshers and Evolution Fresh juices), Evolution Harvest snack bars, and other branded products sold worldwide through grocery stores, warehouse clubs, specialty retailers, convenience stores, and food service accounts. In 2012, this channel development business segment experienced an impressive 50% net revenue increase (due in part to taking all distribution activities back from Kraft) before landing at a more sustainable pace of 10% growth. In 2013, Starbucks generated 9% of total company revenue, or $1.4 billion, in this channel development segment.

The Starbucks name is nearly synonymous with coffee. The brand is certainly the dominant premium coffee in the domestic market. And the company’s multifaceted strategy blocks competitors on all fronts. Diversification can provide flexibility to shift Starbucks’ investments to markets where the greatest returns are possible, rather than the firm staying dependent on only one or a few markets. For instance, the company’s new Evolution brands tap into the thriving health and wellness industry. Or in the case of its Verisimo single-serve brewing line, Starbucks is targeting the home coffee drinker whose daily routine does not include coffee shop purchases. In addition, the company stands to benefit from economies of scaled production, driven by volumes that supply multiple distribution channels.

However, Starbucks’ vertical integration strategy does have potential limitations. If outside suppliers can manufacture products at lower costs, internal (cross-divisional) sourcing transactions may be expensive and reduce profitability relative to competitors. Bureaucratic costs associated with a vertical integration strategy can also cut into the firm’s bottom line. In addition, substantial investments in specific technologies may negatively impact the firm’s flexibility, especially when technology changes quickly. Finally, shifts in demand can lead to coordination and capacity balance issues.

There are also risks associated with firms diversifying in search of economies of scope and operational relatedness. Synergy created by business units working together can be elusive when diversified investments become too inflexible. As a firm increases its relatedness among business units, it also increases its risk of corporate failure because synergy produces joint interdependence among businesses that constrains the firm’s flexibility and responsiveness. Furthermore, development and monitoring costs can become substantial as the firm expands into new businesses and markets.

Diversified firms must select a business-level strategy for each of the businesses in which it decides to compete. The business strategy for each of Starbucks’ product lines is clearly one of differentiation. For each of its premium brands, Starbucks offers distinctive products for customers who value differentiated features more than they value low cost. Product differentiation based on ingredients, quality, uniqueness, flavor, and handcrafting is thoughtfully presented in store settings and coupled with service programs to enhance consumers’ experiences. Café ambiance is a key distinguishing element for the coffee brand, and the company has invested heavily in its Digital Ventures business to attract and satisfy customers. Differentiation requires a thorough understanding of what target customers value, the relative importance they attach to the satisfaction of different needs, and for what they are willing to pay a premium. Going a step further, Starbucks is exploiting this awareness and the power of its brands to drive the sales of consumer packaged goods in alternative retail channels.

Despite enormous investments and an aggressive, multifaceted strategy to turn the coffee giant into a diverse CPG company, it might seem surprising that Starbucks should still be classified as a dominant-business with low levels of diversification even though it is outperforming nationally and internationally focused firms (Hambrick, 1982). In both 2012 and 2013, 88.3% of Starbucks’ revenues were earned in company-owned and licensed stores, while 11.7% of sales were earned in consumer packaged goods, food service, and other categories. (Refer to Table 2 in the case.) Single sales of premium coffee and coffee drinks in U.S. bricks-and-mortar retail shops continue to drive the majority of the company’s revenues.

As a dominant-business with low levels of diversification, Starbucks must act as such, either by (1) further diversifying to achieve a related diversification strategy with greater synergies, linkages between product lines and sales channels, and shared operational activities, resources, key competencies, and knowledge, or (2) remaining focused on dominating the coffee segment, resolutely pursuing its goal to be the third-most-common place to frequent (after work and home) in the morning and during the lunch and evening hours. The company will need to generate more than 30% of its revenue beyond the Starbucks coffee shop to build a highly developed corporate capability for transferring one or more core competencies across businesses. The worth of business portfolio in the company measured the value of corporate-level strategy in regard to both its management and ownership. On the other hand, does diversification impede the company’s ability to maintain a premium aura for certain products or in certain distribution points? In other words, are all of its diversified brands (such as the juices, snack bars, carbonated beverages, or ready-to-drink Tazo teas) distinctive enough to establish value and command premium prices? Does the company’s two-tier structure for coffee and tea products distract from or damage Starbucks’ premium branding strategy? Furthermore, do the company’s lean operational practices and cost-cutting store management processes reduce its ability to differentiate effectively, leaving the firm “caught in the middle”? An affirmative response to any of these questions is an argument for managing increased diversification efforts with caution and for reinforcing the company’s focus on the components of a premium brand differentiation strategy.

Comparisons of Product Development Strategies, Advantages and Disadvantages

Starbucks has engaged in a product diversification approach to create value for stakeholders and competitive advantages for the firm. The company has achieved new product development in multiple ways – through acquisitions, internal innovation, and cooperative arrangements. The table below identifies the development strategy associated with each of Starbucks’ new product lines.

Product/Brand Acquisitions Partners Internal Innovation
Juices Evolution Fresh
Baked Goods Bay Bread Baked Menu Items
Breakfast Sandwiches
Fruit and Nut Bars Whole Foods Evolution Harvest
Yogurt Parfaits Danone
Breakfast Sandwiches Breakfast Menu Items
Bagged Teas Tazo PepsiCo
Whole Foods Exclusive Blends
Loose-Leaf Teas Teavana Oprah Chai Tea
Carbonated Beverages Fizzio
Refreshers
Energy Drinks PepsiCo Starbucks Refreshers
Coffees Seattle’s Best Coffee PepsiCo Light Roast, Seasonal, and Reserve Blends
Instant Coffees Starbucks VIA Ready Brew
Single-Cup Brewing Clover
Single-Serve Pod Drinks Keurig Verisimo
Through acquisitions, partnership agreements, and internal innovation, Starbucks is striving to gain market power, improve performance, and fuel growth. The company is simultaneously:
» upgrading café product offerings to drive same store sales growth (SSSG),
» vertically integrating to reduce costs and boost profits, and
» Extending its reach into new sales channels to leverage brand and product value.
In addition to complementary products that can be introduced in Starbucks stores, the company has acquired or launched new product lines which can expand the firm’s capabilities, access growing markets, improve quality, and perform outside of the Starbucks coffee shop model.

Achieving greater market power is a primary reason for making acquisitions. Market power derives from the ability to sell goods above competitive pricing levels or from performing primary or support activities at a lower cost than competitors. Market power depends upon the size of the firm, the quality of the resources it uses to compete, and the company’s share of the market(s) in which it competes and can be achieved through buying of competitors, suppliers, distributors among others for the advantage of a firm’s primary market acquisition.

Starbucks’ acquisition of Seattle’s Best Coffee was a horizontal acquisition because the company competed in the same industry. Horizontal acquisitions should increase a firm’s market power by enabling cost-based and revenue-based synergies. In this case, after sidelining the former competitor for several years, Starbucks used the brand to pave the way for aggressive expansion into CPGs. Meanwhile, the company eliminated a direct obstacle to achieving its ubiquitous café strategy.

Several of Starbucks’ acquisitions stemmed from targeted menu and product sourcing decisions. By vertically purchasing firms that could be scaled to supply its coffee shops, Starbucks forged opportunities to create value through backward value chain integration. Strategic alignment and the control of product development, costs, access, quality, and exclusivity are the benefits of the company’s vertical acquisition strategy.

Finally, Starbucks has also made related acquisitions – acquiring firms in highly related industries. Purchasing Teavana was a major move into the estimated $90 billion tea industry, an intended game changer in a category that Starbucks believes is “ripe for reinvention and rapid growth”. This provides the company with an alternative format to achieve its ubiquitous café strategy as the firm faces domestic market saturation. In addition, Starbucks purchased the Clover single-cup brewing system. The value of this related acquisition is created by synergies from integrating both companies’ resources and capabilities. The table at the top of the next page summarizes Starbucks’ recent acquisitions.

Product/Brand Acquisitions Acq. Price Type Stand-alone CPG
Juices Evolution Fresh $30 million Vertical 4 X
Baked Goods Bay Bread $100 million Vertical 19
Bagged Teas Tazo Vertical X
Loose-Leaf Teas Teavana $620 million Related 300 Mall* X
Coffees Seattle’s Best Horizontal X
Single-Cup Brewing Clover Related
* Plus 3 new flagship stand-along neighborhood shops.

Acquisitions can reduce the cost of new product development, increase the speed of delivering new products to the market, and provide access to capabilities that the firm is lacking. Introducing internally developed products into the marketplace can require a significant investment in resources. An estimated 88% of innovations fail to achieve adequate returns; and approximately 60% of innovations are imitated within 4 years of obtaining patents. Consequently, internal product development can be seen as a high-risk activity. It can also be a slow process. An acquisition strategy can not only be a more predictably profitable source of new products, but it can be a faster method of introducing new products into the market. In addition, research shows that firms can broaden their knowledge base and reduce inertia through acquisitions. However, using acquisitions to reduce the risks of internal product development requires some caution. Using an acquisition strategy, the firm needs to protect its own innovation capabilities as well as strategically plan the integration of acquired products and resources into current operations.

A competitive advantage results from an acquisition strategy only when private synergy is created. This happens when acquired assets yield capabilities and core competencies that could not have been developed by combining and integrating either firm’s assets with any other company. Thus, the acquiring and acquired firms’ assets need to be complementary in unique ways. Although difficult to create, the attractiveness of private synergy is that, because of its uniqueness, it is difficult for competitors to understand and imitate. Thus, it becomes the source of novel competitive advantages.

The company’s value chain stages, in which resources and capabilities are shared is achieved by its strategic alliances with companies such as Danone, PepsiCo and Whole Foods. However, it’s dissolved partnerships with Kraft (distribution agreement) and Keurig Green Mountain (diversifying strategic alliance) demonstrate the challenges of achieving success with a cooperative strategy. Starbucks prematurely terminated its contract with Kraft because the terms of the agreement limited the company’s ability to pursue other promising market opportunities. And unfortunately, it appears that Starbucks engaged in opportunistic behavior related to the Keurig relationship. At the time of Keurig’s patent expiration, Starbucks used its knowledge of the former partner’s K-cup technology to launch its own competitive Verisimo system.

Beyond tangible product development, Starbucks has heavily invested in digital innovation as a new source of both growth and operational excellence. In addition to pioneering digital capabilities through its Digital Ventures division, the company has partnered with Internet giant, Google, and mobile payments start-up, Square, for access to technologies that are linked to enhancing customer experiences, service, convenience, and loyalty. These initiatives enrich the company’s marketing activities in the value chain; and together with its use of social media tools, Starbucks is building a competitive advantage in the firm’s management of the reach, richness, and affiliation of its customer relationships. Consequently, the company clearly sees its Digital Ventures as a major driver of new growth, customer loyalty, and shareholder value. Starbucks is the retail industry’s “unquestioned” leader in mobile payment and mobile loyalty; and interestingly, the company is now uniquely positioned to develop and monetize its digital leadership into new platforms, revenue streams, and growth.

The advantages and disadvantages of acquisition, cooperative, and internal innovation strategies are summarized in the following table.

New Product Development Strategy Advantages Disadvantages
Acquisitions – Access to new products – especially to diversify
– Increased speed to market
– Lower risks
– Access to new capabilities
– Opportunities for private synergies – Loss of internal innovation capabilities
– Integration difficulties
– Management challenges
– Difficulty achieving synergies
– Extensive debt (if used to fund acquisitions)
– Loss of focus – potential for overdiversification
– Potential to pay premium for acquisitions
Partnerships – Opportunities for collaborative advantages and social capital
– Access to complementary resources
– Shared risks and resources
– Increased new product development speed
– Learning new knowledge and business techniques – Contract oversights
– Misrepresentation of skills
– Coordination difficulties
– Monitoring costs
– Misuse of resources
– Opportunistic behavior
– Unequal commitment
Internal Innovation – Development of strategic capabilities to outperform competitors – High R&D costs
– Low success rates
– High risks
– Competitor imitation

Starbucks International Business and Recommended Strategy

As of mid-2014, Starbucks operated 20,000 stores in 64 countries. With penetration and dominance in the domestic marketplace, continued expansion into international markets is critical to achieving the company’s ultimate goal of “global domination”. As the next table reveals, Starbucks’ largest share of business is still conducted in the Americas. Its other international divisions represent only a very small percentage of corporate revenues.

Global Division Percentage of Revenues Notes
Americas 74% Limited growth opportunities in domestic market
Interests in nearby South American coffee-growing regions make it a logical target market
Cash generation to fund expansion
Europe, Middle East, Africa (EMEA) 8% Struggling with profitability
Flat SSSG
China/Asia-Pacific (CAP) 6% Fastest growing business segment
Highest profit margin

Despite its prolific core retail coffee shop presence at home, Starbucks still accounts for only a “small share of the total global coffee occasions”. “Significantly under-stored” and “ripe for expansion in several markets”, the company is meeting disparate conditions in different regions throughout the world in its efforts to expand storefronts internationally.

In the Americas, particularly in North America, growth rates are stunted due to market saturation. Future growth in the domestic market will depend heavily upon increasing store traffic and same store sales receipts. With online traffic cutting into store volume, Starbucks is also relying on digital investments to offset this trend.

Elusive profits and same store sales growth in the company’s EMEA division have led to changes in ownership structure practices. Moving away from company-operated stores in favor of licensed and franchised stores, Starbucks has begun to see a slight rise in these performance metrics. However, the brand value in these markets is in question. Its commoditized shop model might not be going over well in EMEA countries due to ineffective differentiation; but surely the lack of prosperity in some regions interferes with the success of its premium brand and pricing model.

Alternatively, the CAP division is producing a 27% growth rate, and the company is discovering the potential for large demand to materialize in these emerging markets. The brand is resonating with consumers. The potential market size, economies of scale, and learning opportunities are enormous. And it is likely that Starbucks’ cross-border strategic alliance with Tata Global Beverages Ltd. has played a key role in the success in this division. The company can apply its experience with this joint venture to overcome entry difficulties in other nations where culture, norms, trade policies, local knowledge, and competitive factors differ from Starbucks’ home market.

In order to be responsive to the needs and conditions in each of these global regions, the arguments for adopting a multi-domestic international strategy are strong. This entails the use of decentralized decision making to allow each business unit the opportunity to tailor its strategy to the needs of local markets. Taking into account variant consumer desires, industry conditions, political and legal influences, and social norms, the ability to maximize competitiveness is the primary concern of this approach. As Starbucks’ positions in these markets mature, knowledge sharing across markets (capturing excellent ideas that can be beneficial across divisions) will enhance the effectiveness of the strategy. And the company should look for ways to expand global economies.

Note: Starbucks’ move into the tea category can stimulate an interesting discussion of opportunities in the EMEA and CAP markets, where tea drinking habits far exceed the popularity of coffee.

Strengths and Weaknesses of the Recommended Strategy

Prior to 2007, Starbucks’ growth strategy was aimed at global domination by attempting to commoditize the premium coffee shop – or combining ubiquity with high-end product offerings. The company’s dramatic, pre-transformation growth implosion revealed the plan’s deficiencies. By 2013, the company was still aiming to be “the leading retailer and brand of coffee” in its target markets, but this time through a “disciplined” and selective expansion of stores in new and existing markets, as well as by increased sales in existing stores. This new approach seems to have stabilized the company’s foundation for growth and energetically established multiple avenues to create value.

Starbucks’ strategy has reshaped the firm’s competitive scope, lessening the company’s product and/or market dependencies. It has created opportunities for economies of scope through shared resources and expanded sales channels. The company’s vertical and related acquisitions have been particularly critical to achieving scale and operational efficiencies, allowing shared activities, and expanding the pool of core competencies. The current strategy employs innovation centered on the core business, which is critical for a differentiation strategy requiring continual upgrades valued by consumers. Perhaps the intangible resources developing within the corporation – linkages among product lines, knowledge, experience, expertise, and private synergy – are the most important strategic benefit. They are difficult for competitors to understand and imitate, providing a powerful competitive advantage over rivals.

The company’s strategy produces a constantly changing portfolio of products that complement each other and satisfy or enrich the customer’s experience. And this enables price points that substantially exceed costs, allowing the firm to outperform rivals and earn above-average returns. Because Starbucks seeks to be different from its competitors on as many dimensions as possible, the company is buffered from rivals’ actions. Through innovation, perceived prestige and status, technological leadership, and menu expertise, Starbucks has created real or perceived value as a strong basis for differentiating its offerings and brand.

However, some concerns can be raised about the potential to over diversify or become too large. Increased levels of diversification can have a negative effect on Starbucks’ long-term performance. (Refer to Figure 6.3 in the text.) Greater managerial complexity and information processing can lead to over-reliance on financial rather than strategic controls to evaluate business unit performance. This causes focus on short-term outcomes at the expense of long-term investments and the achievement of strategic objectives. While economies of scale and enhanced market power are desirable, the complexities generated as the size of the firm grows yields bureaucratic controls intended to manage expanded operations. Rigid and standardized executive behavior which results from legalized behavioral and supervisory rules diminishes flexibility and responsiveness and may reduce internal innovation – all needed to develop product offerings that to appeal to changing preferences and to enhance customer experiences. Even though Starbucks’ strategy is reinforced with organizational and leadership systems support, the company must cautiously manage the diversity of products, brands, and channels to avoid damaging the core coffee business and elite Starbucks’ brand. In addition, there is an inconsistency between the regional design initiatives and the company’s strategy of commoditized ubiquity. Massive customization is not scalable and dramatically increases costs, decentralizes decisions, and reduces control of processes and management of the brand image.

Ultimately, the success of the strategy is measured by its effect on the company’s value. Financial figures are limited in the case, but revenues, shares, and same store sales growth metrics are positive. And the strategy does appear capable of establishing sustainable and profitable growth. However, even though Starbucks is employing a more disciplined approach, it is still aimed at commoditizing premium product offerings and growth to the point of global market dominance. Fundamental economic principles are at odds with this vision. The laws of supply and demand illustrate a negative relationship between price and quantity demanded. As prices increase, demand decreases. Starbucks is a premium brand; but even a cool brand is not shielded from this principle. Premium, high-priced products are incompatible with ubiquity. The proposition is only realistic as prosperity increases. One might ask, was it really the strategy that failed in 2007, or was it the recessionary conditions that soured consumers on products that could be considered a luxury. And now, how can a brand achieve ubiquity with a premium product dependent upon economic conditions throughout the world?

References
Hambrick, D. M. (1982). Strategic Attributes and Performance in the BCG Matrix. Academy of Management Journal, 500-532.