Starbucks Company’s Internal & External Challenges

Executive Summary

The report outlined the internal and external challenges that Starbucks faced. The factors included competition, economic factors, and technological factors while the internal challenges included lack of work performance culture among the employees, lack of ingredients in some stores, and diminishing company values. The report outlined the cost reduction measures, innovation, and measures to overcome the challenges. It was recommended that the company should put in place external communication policy, streamline the leadership process and put a mechanism to ensure efficiency in the supply chain. The key lesson from the report was the importance of an inclusive leadership style in the implementation of the change process and effective communication.

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Introduction

The following report is an analysis of Starbucks. It covers the challenges faced by the company from February 2007 and the effectiveness of the measures taken to address the challenges.

External and Internal Challenges

One of the external challenges was increasing competition. For example, there was a proliferation of specialty coffee retailers and other established companies dealing with food and beverages that entered the market (Koehn et al. 2014). An example of a competitor was Dunkin Donuts; an England based company dealing with drip coffee which had espresso machines in different locations.

For instance, in 2006, Dunkin Donut brought into the market coffeehouse aesthetic and increased its presence in the U.S. Also, there was competition from McDonald’s, an established food chain. The other external challenge related to the economic situation in the U.S. during the period between 2007and 2009. There was a sagging economy experienced in the U.S. in 2008. For instance, there were increases in the price of gas and milk which consequently affected the operational costs of the business. Also, there were technological challenges that the company faced. The following is the PESTEL model that provides an in-depth analysis of the external challenges that the company faced.

PESTEL analysis is a strategic planning tool that deals with macro-environmental factors that affect the operation of a business (Vrontis & Pavlou 2008). The tool offers an overview of the external fields. The main fields covered are social, technological, economic, environmental, political and legal factors (Buchinger, Ranaivoson & Ballon 2015). These elements affect the operation of the business and are key determinants of the strategic position of an enterprise. It is worth noting that though the business does not have direct control over these elements, internal strategies at the company’s level can help in overcoming the external forces (Buxel, Esenduran & Griffin 2015; Ericksen& Dyer 2010). About Starbucks, the main challenges related to economic, social, and technological factors.

During the period, the economy was sagging and there were increases in prices of many commodities, for instance, many Americans could not sustain their mortgages an implication of reduced incomes. Also, Starbucks faced the challenge of technology. The company had not invested in technology that could match the needs of the 21st century. For example, the company did not have an interactive website. Due to a lack of technology, the company could not restore the confidence of customers after many attacks by bloggers. The lack of social interaction platform with its customers affected its strategic positioning.

Schultz acknowledged that the company lagged behind its peers in the digital space; for instance, by 2008, the company had only a basic information website. The company also was failing to take advantage of the opportunities to interact with its customers.

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Economic factors have a direct effect on the operations of the business. The economy was sagging. This affected the cost of operations and the ability of the company to sustain its employees. For example, there was an increase in the price of gas and milk which are crucial in the operation of Starbucks. This affected the revenue of the company. Politically, the environment of operation was stable and there were no legal hurdles. Regarding the environment of operation, Starbucks faced a challenge related to falsehood attacks on its environmental sustainability practices (Koehn et al. 2014). For instance, London’s Sun newspaper alleged that the sanitizing process wasted “millions of liters of precious drinking water”. This portrayed the company as being environmentally irresponsible.

Internal Challenges

There were internal challenges including complacency of employees, the original Starbucks’ company values were no longer cherished by the staff. For instance, Schultz pointed out that the managers were disinterested with the work and only concerned with the gross margins instead of the organizational values. Also, the barristers did not have a traditional connection with customers. Some stores were running out of stock. During the time of change, there is the need to abandon some organizational practices to ensure that a change is implemented in the organization. However, some forces may derail the change. This is best understood by the use of force field analysis; an approach that is used to list and assess the various forces that support and those against a proposed change (Bamford & Forrester 2003).

The model is applied as an effective team-building tool. It serves as the basis for overcoming hurdles to the proposed strategic change. It contains driving and restraining forces. In the case of Starbucks, both internal and external forces presented the challenge to the change process. It is worth noting that if there is an equilibrium between the forces, then change cannot be realized. Therefore, there must be an imbalance in which the driving forces overcome the restraining forces. In Starbucks, the driving changes included the strong need to restore the values of the company, improve the value to stakeholders and restore profitability, a team prepared for change, supporting shareholders, and loyal customers. On the other hand, the restraining forces were cynicism by the media and some stakeholders, sagging economy and rituals. Figure 1 is Starbucks force field analysis

Starbucks force field analysis.
Figure 1: Starbucks force field analysis.

Overcoming the Challenges

To overcome the external and internal challenges, the CEO did put in place strategies to restore the stakeholder value. For example, about competition, the CEO proposed to put in place strategies that focused on long term goals instead of the short term expectations of the stakeholders. Also, the CEO engaged shareholders throughout the change process. For instance, there were meetings held to brief the shareholders on the change process that was planned. It is worth noting that high levels of performance can be enhanced by a clear understanding of the competitive position of a company.

The change process that was undertaken can be understood by the use of the McKinsey 7-S Framework that best presents the organizational alignment. The change model is based on seven factors that are needed to ensure the effective execution of a strategy (Tracey & Blood 2012). The model is based on the inter-relationship of the seven factors. The factors must be aligned to improve the performance of the organizations.

Kathuria, Joshi, and Porth (2007) argued that the 7-S framework provides a robust approach in examining the organizational alignment. However, Woods and Wall (2007) noted that no evidence that supports the veracity of the framework. Also, Woods and Wall (2007) noted that the model does not specify the importance of the seven factors. In support of the model, Tracey and Blood (2012) pointed out that all firms experience different environmental challenges. As a result, there is a need to put in place strategies that enhance competition and sustainability. As such, the 7-S framework acts as the basis for an excellent start point in the identification of what the company requires to succeed.

Also, to overcome the challenges, the CEO employed a leadership style that promoted shared values. In the organizational change process, the key factors affected as listed in the McKinsey model included skills, staff, style, systems, structure, and strategy. The leadership style entailed communicating his story and value proposition to the shareholders and leaders. Another move was to reduce the pace of rapid store opening. The CEO went against the established company’s culture and closed down some stores. In the process, there was also a strategy of innovation and bringing onboard new products that enhanced Starbuck’s experience. An example was the VIA instant coffee. Other measures entailed restructuring the supply chain and the overall organizational structure.

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In the process of implementing the change, issues arose such as lack of good presence in social media and hence the company capitalized on that and created platforms where it could respond to customers’ concerns. Other issues during the change process were the economic difficulties that were taking place in the U.S. The company had to lay off employees to remain competitive.

The McKinsey 7S Model.
Figure 2: The McKinsey 7S Model.

Effectiveness of the Change Process

Managing and implementing change is a critical factor for the change process. To ensure that the change process is successful; there is the need to put in place a leadership style that ensures that there is the minimization of restraint factors to the change process (Paton & McCalman 2010). Change entails bringing in a new state of things and hence there is the need to involve all the stakeholders in the process of change.

According to Todnem (2005), an effective change process entails addressing the concerns of the people, engaging the top leadership of the organization, implementing the change process at the top, and employing effective communication. In the case of Starbucks, the CEO started with strategies to address the human issues that may have opposed the change. This entailed informing the shareholders and the top leadership of the need for change and the importance of restoring organizational culture to ensure value. Hence, he convinced them to believe in the change process.

Organizational change normally unsettles people at different levels of an organization. Therefore, to ensure that the change is embraced at the lower levels of the organization, the change must start at the top. Petrescu (2010) noted that the leaders must embrace the change to transfer the knowledge to other parts of the organization. In this case, the change started with the restructuring of the top leadership. To ensure that the change is acceptable, there is the need to communicate the vision and change strategies to all stakeholders. Communication plays a critical role in the functions of any organization (Raile et al. 2009).

For instance, in the recent past, there has been a shift from the bureaucratic and formal communication process to an interpersonal interaction among employees in organizations. The communication should flow in all directions. It is worth noting that failure in communication causes speculation and hence cynicism (Nelson 2013). In the case of Starbucks, the CEO had a good communication system in which all the partners received the right information and the processes that were being undertaken. However, there was a hitch when the information leaked to the media and caused a lot of speculation. That affected the confidence of the customers and other stakeholders. The implementation of the change led to the turnover of the company and it was able to expand to China where it has experienced exponential growth.

Recommendations

Based on the analysis, the change process was effective. However, there is a need to take measures that will ensure the sustainability of the change process. Therefore, it is recommended that the company should put the following strategies:

  • Formulate a communication policy to take care of external communication. Based on the analysis, the change process concentrated on the internal factors and neglected external influences and hence the media kept on poking holes to the Starbucks brand. This could have been avoided by a good communication strategy.
  • Starbucks should have the policy to grow the U.S. market to avoid the possible problem of over-relying on the external markets.
  • Starbucks should put in place strategic mechanisms to ensure that the fast growth witnessed in China and other parts of Asia are maintained through an effective supply chain to avoid challenges of shortages of ingredients similar to those experienced in the U.S.
  • About leadership, the company should put in place a system that ensures efficiency and that upholds organizational values. This will ensure continuity in case of existing of Schultz as it was experienced before his comeback in 2008.

Conclusions

Organizational change plays a critical role in the strategic positioning of a company. The case of Starbucks has shown the importance of an inclusive leadership style where the key stakeholders are involved in the leadership process. It has exemplified the need for designing a change process and putting in place measures to lobby for internal support to ensure an effective change process. Also, the case has shown the importance of communication during the change process.

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References

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Paton, R & McCalman, J 2010, Change Management: A Guide to Effective Implementation, SAGE Publications, London.

Petrescu, R 2010, Organizational Change Process–Steps to a Successful Change, Annals of the University of Craiova-Economic Sciences Series, 3.

Raile, A, Kim, R, Choi, J, Serota, K, Park, H & Lee, D 2008, ‘Connections at work: How friendship networks relate to job satisfaction’, Communication Research Reports, vol. 25, no. 2, pp. 168-178.

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