Starbucks: Strategic Management Case Study

Introduction

At the moment the US economy is said to be in a recession by some while others such as the World Bank are saying that the economy is at a standstill. Going by the business performances in the last few months the former seems to hold. Consumers have been tight on their budgets in anticipation of harder times to come as they would expect in a full blown recession period.

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The Giant coffee retailer, roaster and specialty of coffee, Starbuck Coffee Company has not been spared of the slackening of businesses as witnessed by the company’s financial report for the first quarter where it reported a 28% fall in profits. The company produces and sells bottled Flappucino drinks, Doubles hot. Although the fall in profits in the recent past for many companies in the US and the world at large have not been surprising, such a huge cut in profits would not be expected from a company that in the last decade has been doing so well. The drop in profits cannot be attributed to the current economic performance of the country only, but also to increased competition from upcoming coffee houses springing up in every corner to have a share in this lucrative market. The company made some attempts to try and reverse the current situation by replacing its chairman with the chief. This was among the many measures that can be utilized in bringing the company back into profit making ways. The company is thus bent on increasing sales to overcome the decrease in profit margins as part of other recovery programs possible.

The discussion in this paper thus looks at the tips that the company can utilize in increasing sales. It further gives a diagnosis of the possible causal problems that ail the company at the moment and the long term and short term possible solutions.

Problem identification

The first thing that Starbuck is supposed to do is identifying the problems ailing the company and then searching and identifying the best ways to solve them. The problem has led to the fall in profit which many may peg on the current economic situation in the US today. However, the problems do not end there as the company is bound to make its initiative into bringing business back to normal as it was earlier. The problems should be looked at as internal and external.

Internal problems

Rapid expansion without consideration of the economic trends of the nation- Though the company has branches in other countries apart from the US, the home country consists the largest market for the company. As such the company should have speculated upon the reports that started flowing in as early as December 2006 about the projected path of the US economy. During this period the US GDP decreased by a significant margin and the dollar was devaluing gradually against major currencies in the world. As an international company the devaluation should have been treated as a threat to the company operations. (Thompson, 2004).

External problems

This might be hard to differentiate from the internal problems regarding the economy since both are in the same topic of the economy. However, in this problem we cannot lay the blame on the company for business and economic cycles prevailing at the moment.

Another externality afflicting the company is the loss of market share to competition.

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In the analysis of the failure of the company to competitors we should ask ourselves whether the failure is triggered by loss of already existing market and orders or failing to win new markets targeted through expansion programs. This can result from:

  • Not meeting the needs of prospective customers in case of expansion into new markets.
  • Losing regular customers to competitors.
  • Losing customers with special needs.
  • Failing to retain interested customers. (Thompson, 2004).

The above are some of the failings that the company can experience but they do not show the details where energy should be focused and bring the much needed change in the business itself whose results will be magnificently amplified in the whole company and more so sales figures. Perhaps the management should ask itself, why are we losing the above categories of customers? Possible failure points that the company should evaluate are:

Customer perceptions

Customers may perceive lack of commitment from your business or company to the market or product or other sensitive issues such as social responsibility especially in this age of companies ”going green”. The company needs to establish whether there exists a negative perception that is circulating about the company either as a rumor or a competitor carrying out dirty campaign tricks. (Thompson, 2004)

Marketing process

Yes, marketing is not just the act of making advertisements and promotional campaigns but a rather detailed process that starts right roasting coffee in this case. The process consists of identifying tastes, needs, wants, lifestyles and demographic aspects of consumers in the target market and then aligning your business in satisfying their needs better than your competitors. Identification of the qualities of the consumers will have to be done through research and not guesswork. This however does not end there as it is meant to be a continuous process as the market composition keeps on changing so do lifestyles and needs. (Thompson, 2004).

Competition

This has already been identified as one of the problems leading to a decrease in sales. Competition serves as a threat to the company’s market presence and performance and at the same time as a motivator for increased product and service innovation to differentiate the company from its competitors’ as they may have taken cue from your company. When the competitors were making the entry into the market it is obvious that they imitated almost all aspects used by Starbuck stretching from marketing to packaging and the idea of stores location. (Thompson, 2004).

Product quality

Starbuck being the producer and retailer of its own products has a far better understanding of its market than other companies acting as retailers alone without the least idea of how to market the product by way of introducing consumers to the manufacturing process for increased consumer bonding, trust and sense of belonging.

Selling process

This in simple terms decides the company’s overall performance as the above processes are only realized and focused on making the product move from the shelves and meets consumer needs afterwards which is what we call sales. Some of the question that can be probably addressed in this area could be; are the outlets conveniently located, are opening and closing hours corresponding with the consumers lifestyles. (Thompson, 2004).

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Possible solutions

New marketing strategy

Marketing is the most important tool in ensuring that customers are aware of what company products are in store and what makes them different from already existing products. It is also responsible of introducing new products in the market and informing potential customers of the possible use of the product to the consumers. For the case of Starbuck, consumers are already aware of the company’s product and probably know how to locate the nearest Starbuck coffee house. Then it would be correct to say that the existing marketing strategy has already served the purpose and a new one effective in handling the current issues afflicting the company should be put in place as times and market dynamics have changed. Here are some of the tips on approaching the market in a different way.

Market dominance- Starbuck still commands the market and as such should use its position to establish a more involving relationship between the company and the market that should be aimed at locking out the competitors. How this is achieved follows. A good way of doing so would according to me be by creating a forum through which consumers could narrate their first Starbuck experience. This will create a longing feeling for the consumers of the Starbuck coffee who have already switched to consuming coffee from other coffee makers and houses. This will make the customer feel like he is cheating on Starbuck as suggested by product and brand loyalty. (Thompson, 2004).

Porter generic strategies

This strategy by Michael Porter compares the firm’s strategic strength to its strategic scope. In his research he identified three strategies that are easier to implement:

  • Market segmentation
  • Product differentiation
  • Cost leadership.

Starbuck should make it a point to identify different consumers of their wide range of products and use different marketing strategies differently on the different markets. Segmentation will help in focusing the marketing efforts on the right target market without wasting them.

Differentiation of products and services on their outlets- This is more of a response to the activities of the competitors who may have copied products designs among many ways through which they could joy ride on the popularity of the Starbuck brand. However, this process may require a lot of dedication and financing as it will involve changing the adverts and promotional materials currently in the market. Again there has to be an intensive campaign to inform consumers in the change probably of the name of the brand or the physical appearance such as packaging. (Thompson, 2004).

Cost leadership- This can also to some extent be viewed to be a response to the competitors guided by the new market entry strategies applied. It is common knowledge to business managers that one of the most effective ways of impacting in a new market is introducing their new price lower than the existing ones which do not necessarily reflect the production cost as they might be lower. This is used to introduce the product in the market and later increase the prices gradually to profit making levels. This is most effective when combined with product re-launching. (Thompson, 2004).

Improving the customer perception

This is most important in earning the company loyalty from the consumers. Starbuck has already had a significant following which of late has been on the decline as shown by the decrease in the level of profits for the company. By sponsoring the Seattle Sonics, the company could utilize the opportunity by offering ticket to the teams’ matches with some printed adverts on them. Fans of the team would be thus introduced and reminded of the company’s products especially ice creams in such events. With the company based in Seattle consumption of the products is expected as a sign of loyalty.

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In the business world research has shown that it costs three times more money to find a new customer than it would to sell your product to an existing customer. With this in mind attempts to find a new customer base in a new market would definitely be expensive for the company so the best way forward. How this is to be achieved depends on the company’s commitment to the process. One of the many ways to go about it for a company of this magnitude is to horizontally integrate its operations. Internally the company has already made the steps by involving distributors besides their retail stores in the supply of their products in the markets. However, the process is not exhausted as there remains a more interconnected supply chain that the company can utilize in distributing their products to a more grassroots level in the market. (Thompson, 2004).

Another option that the company has partially utilized and has room for full utilization of the process is vertical integration. As per the definition of this term the company has made the right steps in that it owns the manufacturing units and retail stores, in doing so the company can try and form alliances with the distributors of the raw coffee and own the whole process. In the long run this will lower production cost for the company and thereby reduce retail prices for their products. As a proven performer, price leadership will lock out competitors as the new entrants in the market do not have the capital to withstand long periods of break even or loss making sessions in their business in a bid to compete in pricing with Starbuck. As a result the company will reduce competition and maintain a near monopolistic market in the roasting and retailing of coffee and its affiliate products. In such a market sales and profit are expected to take an upward trend as the company will be benefiting not only from sale of coffee and coffee products but from other businesses involved from the transformation and processing of coffee from the farms to the coffee cup. (William and Ferrell, 2006).

Consumption behavior

This relates to how consumption trends in regards to lifestyle changes and their psychological thinking. By understanding these issues the company’s marketing efforts will be more focused on the target market by offering what their psychological thinking tells them is the best.

The study of consumer behavior in the target market will help firms and organizations improve their marketing strategies by understanding issues such as:

  • The psychology of how consumers think, feel, reason, and select between different alternatives of Starbuck brands and competitors products
  • Contribution of the environment on how consumers are influenced by it in doing their shopping. This may include culture and religious attributes.
  • The behavior of consumers while shopping or making other marketing decisions. One question to guide the research in this is, do consumers consume coffee due to addiction or as a normal beverage?
  • Limitations in consumer knowledge or information processing abilities that influence decisions and marketing outcome;
  • How consumer motivation and decision strategies differ between products that differ in their level of importance or interest that they entail for the consumer;
  • How marketers can adapt and improve their marketing campaigns and marketing strategies to more effectively reach the consumer. (William and Ferrell, 2006).

Understanding these issues helps us adapt our strategies by taking the consumer into consideration. For example, by understanding that a number of different messages compete for our potential customer’s attention, we learn that to be effective, advertisements must usually be repeated

Product pricing

What is the connection between sales, profits and prices? The relationship between sales and prices is totally different from the relationship between profits and sales. Though lower prices are always expected to increase sales the same may not apply to profits. On the other hand higher prices may result in a fall in sales volume but fetch higher profits. The sooner the management understands the relationship between these three factors and how they apply in a particular market as theoretical findings may not hold at all times. In this case the company has reported a fall in profits which is being blamed on a fall in sales volume resulting from increased competition and a deteriorating US economy that is decreasing consumption spending among consumers. Research is necessary at this point to determine the results of consumer fears in spending that may be connected to the economic slump and thereby increase consumer confidence in consumption of foodstuff as coffee products happens to be one of them, in doing so the company will have probably foregone sales for profit or the other war round. But as a profit making company foregoing sales volumes for profits is the most rational idea at the moment. (William and Ferrell, 2006).

Self analysis

This is the best way for the company to analyze its position the market especially after the entrance of serious competition. As one of the pioneer companies to popularize coffee consumption in coffee house the previous position the market cannot be assumed. At the moment there is increased threat from competitors and the economic situation of the US and the world at large which need to be newly addressed. My recommendations to the company would not be complete without including carrying out a SWOT analysis test. As times goes by, new threats and opportunities in the market are born and created which calls for a rational response by Starbuck.

Strengths

Here are some of the strengths that we could link to Starbuck.

  • Market presence – The Company has an already established stores chain that makes it a familiar outlet to the market which consumers can identify with.
  • Strong brand name.

Weaknesses

  • Too rapid expansion activities into discovering new markets instead of market concentration initiatives on the already established ones.
  • Damaged reputation following the threat of withdrawing funding for Seattle Sonics if the team is relocated elsewhere

Opportunities

  • The economic situation in the US will see the collapse of small new competitors hence Starbuck as enabled by market presence and an established distribution can occupy their markets.
  • The company has high product innovation capacities

Threats

  • Declining economic performance of the US and the world.
  • Increased competition worsened by product imitation.
  • Pricing wars as competition is utilizing this as their main market strategy.

In recognition of the above issues as having the capacity to promote an increase or further decrease in sales the recommended possible solutions they should be aligned together for positive results.

Conclusion

The war in the manufacturing retail industry is not about to end as more convenient and cheaper methods of doing business are being discovered. Newer and cheaper effective promotional methods are in use ensuring that small payers in the industry get their fair share of the cake. As such, big players in the industry are getting caught by surprise with the prospects of losing their place in the industry. Starbuck happens to be one of them. Other industries where big players are finding it more challenging to operate in markets previously in their personalized turfs is the soft ware industry. Microsoft had operated as a near monopoly in this market but nowadays it has to fight for survival with rather late entrants such as Apple, IBM, and Sunsystems among others.

References

Gitomer, Jeffrey, (2004). Little Red Book of Selling: 12.5 Principles of Sales Greatness, London, Bard Press.

Gitomer, Jeffrey, (1999). Customer Satisfaction is Worthless Customer Loyalty is Priceless. London, Bard Press.

Thompson, Harvey (2004). Who stole my customer: winning strategies for winning customer loyalty, New York, MIT Press.

Griffin Jill & Lowenstein Michael (2001), Customer wins back: how to recapture lost customers – and keep them loyal. California, Jossey Bass, pp. 186-221.

Cox, Billy (2008). The all star sales book: get in the game boost your numbers and earn the big bucks, New York, Prentice Hall.

Ziglar, Zig. (2003). Selling 101: what every successful sales professional need to know, London, Cambridge University Press.

Pride William and Ferrell O. (2006). Marketing concepts and strategies, New York, Houghton Mifflin Co. 610.

Hoffman K et al (2004). Marketing principles and best practices 3rd Ed. South Western College.

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