The Idea Behind the Starbucks Experience

Table of Contents

List of Abbreviations

List of Figures

1 Overview
1.1 Introduction
1.2 The Starbucks Business – Vision, Mission and History

2 The Five Elements of Starbucks‘ Strategy
2.1 The Idea Behind the Strategic Diamond
2.2 Arenas - Where Starbucks is Active
2.3 Vehicles - How Starbucks Gets to the Business Arenas.
2.4 Differentiators – How Starbucks Wins in the Marketplace
2.5 Staging - Starbucks’s Speed and Sequence of Moves
2.6 Economic Logic – How Starbucks Obtains Its Returns
2.7 Starbucks Strategic Diamond – An Integrated Approach

3 Conclusion
3.1 Challenges Starbucks is Facing Today
3.2 How Starbucks Prepares for a Successful Future

Appendix 1 Integral Total Management (ITM) Checklist

Bibliography

Declaration In Lieu of Oath

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1 Storefront of One of the First Starbucks Stores

Figure 2 The Five Major Elements of Strategy

Figure 3 Starbucks Retail Sales Mix by Product Type for the FY 2007

Figure 4 Starbucks Hazelnut Hot Chocolate, Caramel Frappuccino® and Tazo® Chai Tea Latte

Figure 5 House Blend and Organic Shade Grown Mexico by Starbucks Coffee

Figure 6 Now Playing at Starbucks – Choice of Music to Buy.

Figure 7 Choice of Books Currently Sold by Starbucks

Figure 8 Starbucks Revenue Components for the FY 2007

Figure 9 Importance Rankings of Key Attributes in Starbucks Creating Customer Satisfaction

Figure 10 Starbucks Expansion 1987 - 2007

Figure 11 Starbucks Financial Performance 2000-2007

Figure 12 Starbucks Operation Result for FY 2007 Compared To 2006

Figure 13 Starbucks Strategic Diamond

Figure 14 Internet Presence www.mystarbucksidea.force.com

Figure 15 Starbucks Card Rewards

1 Overview

1.1 Introduction

1971, when the ‘Starbucks experience’ begun, Starbucks was just a small coffee shop in Seattle, USA. Today, Starbucks, named after the first mate in Herman Melville’s Moby Dick, is the world’s leading retailer, roaster and brand of specialty coffee with millions of customer visits per week at stores in North America, Europe, Middle East, Latin America and the Pacific Rim.¹ Thus, within not more than three decades, Starbucks’ offering of distinctive blend of quality coffee, neighbourly camaraderie and a unique coffeehouse culture combined with an aggressive growth strategy helped it to become the most famous specialty coffee shop chain in the world and a global company: In 2007, it run more than 15,000 stores worldwide by employing more than 172,000 people.²

But in the same year 2007 - despite revenues of USD 9.4 billion - Starbucks had to report a first-ever decline in same-store sales.³ As early as the mid- 1990s, analysts had been predicting that Starbucks could not sustain such strong growth, especially in same-store sales. For more than 10 years, Star- bucks had consistently beaten these expectations. By 2007, however, Star- bucks unprecedented size, combined with the uncertainty of the economy, had placed the company in a new competitive game. As a result, in early 2008, Starbucks announced a series of initiatives to cope with the new chal- lenges and to prepare for a successful future – all of them based on renewing the focus on customer experience and slowing down expansion.

But what constitutes the Starbucks strategy that has been that successful in the past? What were the main drives of the considerably growth of the Star- bucks business? And is the Starbucks strategy flexible enough to adapt to the current challenging market conditions?

After the introduction of the Starbucks business in terms of vision, mission and history, this assignment focuses on answering these questions by analys- ing Starbucks’ strategy and its key drivers of success in chapter 2. This analysis is done with the model of the ‘strategic diamond’ that is introduced in the beginning of chapter 2 as working basis. The assignment ends a compre- hensive analysis of the challenges Starbucks is facing today and how it pre- pares to successful handle them.

1.2 The Starbucks Business – Vision, Mission and History

According to its vision, Starbucks wants

“To inspire and nurture the human spirit - one person, one cup, and one neighbourhood at a time.”⁴

The company’s overall vision results in the mission:

“To establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow.⁵ ”

To realise its mission and vision, Starbucks tries to follow six principles:⁶

- Ethically sourcing the finest coffee beans, roasting them with great care, and improving the lives of people who grow them.
- Embracing diversity with its partners to create a place where each of us can be ourselves by treating each other with respect and dignity and holding each other to that standard.
- To be fully engaged with its customers by connecting with, laughing with, and uplifting the lives them— even if just for a few moments.
- To offer stores where the customers feel a sense of belonging, a place where they can meet with friends.
- Being good neighbours by bringing together our partners, customers, and the community to contribute every day.
- To ensure the kind of success that rewards our shareholders by being fully accountable to get each of these elements right so that Star- bucks—and everyone it touches—can endure and thrive.

The routes of the company’s reason for being go back to 1971, when three coffee fanatics - Gerald Baldwin, Gordon Bowker and Ziev Siegl - opened a small coffee shop in Seattle’s Pike Place Market. The shop specialized in sell- ing whole arabica beans to a niche market of coffee purists.⁷ Original the name of the company was Starbucks Coffee, Tea and Spices, but later changed to Starbucks Coffee Company. At this time per capita coffee con- sumption in the U.S. was on the decline and supermarket brands dominated the larger coffee market was dominated by supermarket brands.⁸

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Figure 1 Storefront of One of the First Starbucks Stores Source: www.starbucks.com, 07.11.2008.

When Howard Schultz first joined the marketing team of the company in 1982, Starbucks was already a highly respected local roaster and retailer of whole bean and ground coffees. A business trip to Italy opened Schultz’s eyes to the rich tradition of the espresso beverage and espresso drinks be- came an essential element of Schultz’s vision.⁹ Upon his return, he convinced the company to set up an espresso bar in the corner of its only downtown Seattle shop to create a place where people could go to relax and enjoy oth- ers. A few years later in 1987, Schultz got his chance when Starbucks’ foun- ders agreed to sell him the company.¹⁰ As soon as Schultz took over, he im- mediately began opening new stores. The stores sold whole beans and pre- mium-priced coffee beverages by the cup and catered primarily to affluent, well educated female between the ages of 25 and 44. By 1992, the company had 140 such stores in the Northwest and Chicago and was successfully competing against other small-scale coffee chains.¹¹ That same year Schultz decided to take the company public raising USD 25 million out of the public offering to open more stores across the nation.¹² Between 1995 and 2005, the company’s stock rose from about USD 2 to more than USD 30, and it re- mained close to or above that level for much of the following year. Between 1988 and 1998, Starbucks grow its revenues from about USD 10 million to more than USD 1.3 billion.¹³

By 2002, Schultz had unequivocally established Starbucks as the dominant specialty-coffee brand in North America. Sales had climbed at a compound annual growth rate of 40% since the company had gone public, and net earn- ings had risen at a compound annual growth rate of 50%.¹⁴ The company was now serving 20 million unique customers in well over 5,000 stores around the globe and was opening on average three new stores a day.¹⁵

But in late 2006, Starbucks stock began a seemingly relentless descent, los- ing more than half its value in 15 months – from USD 39 in November 2006 to USD 19 in early 2008.¹⁶ In 2007, Starbucks reported a first-ever decline in same-store sales.¹⁷ Nevertheless, by 2007, the coffee company earned USD 9.4 billion in revenues through a network of more than 15,000 stores worldwide.¹⁸ As a result of the weakening business development and the changing business environment, Starbucks founder Howard Schultz decided to return as the company’s chief executive early in 2008 being prepared with a series of initiatives that should strengthen the company’s operation.

2 The Five Elements of Starbucks‘ Strategy

2.1 The Idea Behind the Strategic Diamond

According to Hambrick and Fredrickson “[...] a strategy is an integrated, over- arching concept of how the business will achieve its objectives.”¹⁹ Both pre- sented a framework for strategic design, arguing that a strategy has five ele- ments that must finally form a unified whole:

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Figure 2 The Five Major Elements of Strategy Source: Hambrick et al. (2001), p. 51.

According to figure 2, a strategy has five elements proving answers to five questions:

- Arenas: Where will we be active?
- Vehicles: How will we get there?
- Differentiators: How will we win in the marketplace?
- Staging: What will be our speed and sequence of moves?
- Economic logic: How will we obtain our revenues?

Thus, a strategy must be a combination of all five elements as it only works successful as a whole. A company’s mission and objectives should stand apart from the strategy and guide it. Also choices about internal organiza- tional arrangements are not a part of a strategy, but they should reinforce and support strategy.²⁰

The choice in what areas the business will be active is the most fundamental one. Therefore it is important to be as specific as possible about product categories, market segments, geographical areas, core technologies and value adding stages by also defining how much emphasis will be places on each.²¹

It is also important for the company to decide how to get to the arenas where it aims to do business in. It is a decision about the means to use. According to Hambrick and Fredrickson “failure to explicitly consider and articulate the intended expansion vehicles can result in the hoped-for entry’s being seri- ously delayed, unnecessarily costly, or totally stalled.”²²

Another essential choice is to define how the company will get customers to come its way. It is about how the company aims to differentiate to win in the competitive battle field.²³ And there are numerous differentiation opportuni- ties: image, customization, price, product styling, after sale services – to name only a few.

To decide about staging means to decide about the speed and sequence of major moves to take in order to increase the success rate. Often, there are no equal balanced initiatives at all fronts at all times but some must come first whereas others have to follow.²⁴ Resources, urgency and the achievement of credibility are a decision factors in staging.

There is no doubt that the core of a business strategy must be a clear eco- nomic logic of how to generate profits – that are of course above the com- pany’s cost of capital.²⁵ For a strategy to become successful when imple- menting all five elements have to be aligned in the way that they supported each other. If so, the strategy consists of a comprehensive, integrated activity system. The following chapters 2.2 to 2.6 deal in detail with Starbucks’ strat- egy by evaluating the above mentioned five main elements and analysing its underlying principles to get the core of the Starbucks experience.

2.2 Arenas - Where Starbucks is Active Product Categories

Starbucks purchases and roasts high-quality whole bean coffees and sells them along with fresh, rich-brewed, Italian style espresso beverages, a variety of pastries and confections, and coffee-related accessories and equipment -- primarily through its company-operated retail stores.²⁶ Within Starbucks retail sales mix beverages are of special importance, making up 75% of Starbucks revenues in 2007:

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Figure 3 Starbucks Retail Sales Mix by Product Type for the FY 2007 Source: Starbucks Corporation (2008), p. 3.

More in detail, Starbucks product range comprises the following²⁷:

- Coffee: More than 30 blends and single-origin coffees
- Handcrafted Beverages: Fresh-brewed coffee, hot and iced espresso beverages, coffee and non-coffee blended beverages, and Tazo® teas
- Merchandise: Assorted home espresso machines, coffee brewers and grinders, a line of premium chocolate, coffee mugs and coffee acces- sories, and a variety of gift items.
- Fresh Food: Baked pastries, sandwiches and salads.
- Starbucks Entertainment: A selection of the best in music, books and film from both emerging and established talent, offering Starbucks cus- tomers the opportunity to discover quality entertainment in a fun, con- venient way.
- Global Consumer Products: Line of bottled Starbucks Frappuccino® beverages, Starbucks Discoveries® chilled cup coffee (in Japan, Tai- wan and Korea), Starbucks DoubleShot® espresso drinks, Starbucks® Iced Coffee, whole bean coffee and Tazo® teas at grocery, Star- bucks™ Coffee Liqueurs and a line of super premium ice creams.

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Figure 4 Starbucks Hazelnut Hot Chocolate, Caramel Frappuccino® and Tazo® Chai Tea Latte Source: www.starbucks.com, 12.11.2008.

Abbildung in dieser Leseprobe nicht enthaltenAbbildung in dieser Leseprobe nicht enthalten

Figure 5 House Blend and Organic Shade Grown Mexico by Starbucks Coffee Source: www.starbucks.com, 12.11.2008.

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Figure 6 Now Playing at Starbucks – Choice of Music to Buy. Source: www.hearmusic.com, 12.11.2008.

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Figure 7 Choice of Books Currently Sold by Starbucks Source: www.hearmusic.com, 12.11.2008.

Market Segments

Starbucks operates in the speciality coffee market. Thus, people, especially younger ones, with a special interest in coffee are the key target group. Star- bucks line of non-coffee based blended beverages in fruit, cream, and tea flavours are favoured by teenagers, an important part of the company’s ex- panding customer base.²⁸ As a result, Starbucks focuses on cities with large populations of young people with spending power.²⁹

Geographic Areas

Although the US are still the main market for Starbucks, its geographical scope is worldwide, or at least all countries where socio-economic conditions support the Starbuck experience. But by doing so, Starbucks international strategy involved focusing efforts on a smaller number of countries with sig- nificant growth potential such as Brazil, Russia, India, and China.³⁰

2.3 Vehicles - How Starbucks Gets to the Business Arenas

As a primary vehicle for getting to its chosen arenas, Starbucks has three reportable operating segments:³¹

- United States
- International
- Global Consumer Products Group (CPG)

The United States and International segments both include company- operated retail stores and certain components of Specialty Operations.³² Specialty Operations within the United States include licensed retail stores, foodservice accounts and other initiatives related to the Starbucks core busi- ness. International specialty operations primarily include retail store licensing operations in more than 30 countries and foodservice accounts in Canada and the United Kingdom.³³ The CPG segment includes the company’s gro- cery and warehouse club business as well as branded products operations worldwide.

Company-Operated Retail Stores

Starbucks strategy for expanding its retail business is to increase its market share primarily by opening additional stores in existing markets and opening stores in new markets where the opportunity exists to become the leading specialty coffee retailer³⁴ Starbucks retail stores are typically located in hightraffic, high-visibility locations. Because the company can vary the size and format, its stores are located in or near a variety of settings, including downtown and suburban retail centres, office buildings and university campuses.³⁵

[...]

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¹ See www.starbucks.com, 11.11.2008.

² See Koehn et al. (2008), p. 14.

³ Ibid., p. 17.

⁴ www.starbucks.com, 07.11.2008.

⁵ Ibid., 11.11.2008.

⁶ See www.starbucks.com, 07.11.2008.

⁷ See Moon et al. (2006), p. 2.

⁸ See Koehn et al. (2008), p. 1.

⁹ See Moon et al. (2006), p. 2.

¹⁰ See Moon et al. (2006), p. 2.

¹¹ Ibid.

¹² Ibid.

¹³ Ibid., p. 1.

¹⁴ Ibid., p. 2.

¹⁵ Ibid.

¹⁶ Ibid., p. 1.

¹⁷ Ibid.

¹⁸ Ibid.

¹⁹ Hambrick et al. (2001), p. 48.

²⁰ See Hambrick et al. (2001), p. 49.

²¹ Ibid., p. 50.

²² Hambrick et al. (2001), p. 51f.

²³ See Hambrick et al. (2001), p. 52.

²⁴ Ibid.

²⁵ See Hambrick et al. (2001), p. 53.

²⁶ See Starbucks Corporation (2008), p. 1.

²⁷ See www.starbucks.com, 11.11.2008.

²⁸ See Koehn et al. (2008), p. 17.

²⁹ Ibid., p. 9.

³⁰ See Koehn et al. (2008), p. 9.

³¹ See Starbucks Corporation (2008), p. 1.

³² See Starbucks Corporation (2008), p. 1.

³³ See Starbucks Corporation (2008), p. 1.

³⁴ See Starbucks Corporation (2008), p. 2.

³⁵ Ibid.