Introduction Starbucks, the biggest coffee retailer in the world, grows from a small, regional business into the undisputable leader in the specialty coffee industry. It arrives in the UK in 1998 with the acquisition of Seattle Coffee Company in the UK as its starting point. As soon as it expanded, many native coffee stores were driven out of business and other big rivals were forced to quicken their growth to beat this new invader. From then on, Starbucks remained the market leader leaving others far behind until recently some coffee giants such as Costa are catching up.
In view of the big susses of Starbucks in the UK, this essay tries to analysis its competitive strategies which are the core elements to its success. In the second part, the organization’s strategic position is described. In the third part, the external drivers affecting this organization are illustrated. In the fourth part, the value adding in this organization is thoroughly analyzed. Last, the evaluation of the sustainability of the organization’s strategic position is made.
The organization’s strategic position 1) Based on generic strategy.
Strategic position is a position taken by an organization to gain competitive advantages at present and in the future, which includes the devising of the right goals of the organization, developing optimal strategies based on the goals and the present environment, and putting these strategies into practice to realize the goals (Porter, 2001). According to Porter’s generic strategy, an organization’s strategic position is given by its choice of competitive advantage, cost leadership or differentiation, and its choice of competitive scope, narrow or broad (Porter, 1985).
So, organizations can take four different strategic positions, as shown in the following diagram. Coast leadership refers to being a low cost producer for a given level of quality by targeting a broad market. Differentiation refers to the offering of unique attributes that are valued by customers. It is also a strategy targeting broad market. Cost focus means adopting cost leadership strategy in a narrow target and differentiation focus means adopting differentiation strategy in a narrow target. [pic] Source: Porter, 1985, Competitive Advantage.
According to this generic strategy model, Starbucks obviously positions itself in differentiation strategy in UK. As a coffee maker, Starbucks differ itself from others through the quality of its products and its consistently superior consumer experience. Starbucks has strong research and development capabilities to ensure high level of product quality. Moreover it focuses on product innovation. For example, Starbucks has differentiated its product lines to include teas, sodas, ice creams, foods, etc in UK. As to its targeted market, Starbucks has a very broad scope.
In 1998, Starbucks purchased the Seattle Coffee Company in the UK, which had 60 retail locations, and built the business to 300 shops. Starbucks’s marketing strategy was to go all-out in new markets, opening stores quickly and putting pressure on rival firms there (Karolefski, 2009). On the other hand, thought Starbucks are making its effort to cut cost in UK, the cost of sales including occupancy costs and operating expenses are still high enough to negatively affect its profit. So, it seems that Starbucks cannot achieve low cost at present.
Therefore, it is no doubt that Starbucks in UK has positioned itself as a differentiation competitor. 2) Based on Strategy Clock Since Porter’s generic strategy is criticized as too simple and not collectively exhaustive (Kotha and Vadlamani, 1995), it is necessary to analyze Starbucks’s strategic position from another approach. Based on generic strategy, Bowman expanded strategic positions to 8 different kinds, which are incorporated in a new model called strategy clock as shown in following. Strategy Clock involves two main concepts, one is the price, and the other is perceived added value.
The first to the fifth options are feasible while the last three always lead to market loss. [pic] (Source: Johnson, Scholes and Whittington, Exploring Corporate Strategy, Prentice Hall, 2005) Applying Bowman’s improved model to Starbucks, it is easy to find out that Starbucks adopts differentiation strategy with premium price. The reasons are: first, its perceived added value is high. As analyzed previously, Starbucks offers one of the best coffees in UK, not only in its quality and flavors but also in its service.
When Starbucks first appeared in UK, people thought it cool because of the unique decoration, the special environment, and the warm welcomes. Second, it is widely known that the coffees in Starbuck are little pricey. In UK, the price ranges from ? 1. 5 to ? 3. 50, while the average coffee price is ? 1. 3 (Eurocheapo, 2009). From the above two approaches, the specific strategic position Starbucks takes can described as differentiation in high quality and innovative products and unique service but with relatively high prices in large market scope.
External drivers affecting this organization 1) PEST analysis of the macro drivers PEST is the acronym for political, economic, socio-cultural, and technological (Partridge, 2005). PEST analysis is a convenient tool for organizations in conducting macro environment scanning. It can help to find out those external drivers of change which are affecting the organization. The specific aspects in each element to look into are shown in following table. PEST Analysis |Political: |Economic: | |Taxation |GNP Trends | |Legislation |Interest Rates | |Foreign Trade.
|Inflation | |Employment law |Disposable income | |Government Stability |Unemployment | |Socio-Cultural: |Technological: | |Demographics |Government R&D spending | |Social mobility |New R&D developments | |Lifestyle changes |Speed of technology transfer | |Consumerism |Rates of obsolescence | |Levels of education | | The following is an analysis of the macro drivers of Starbucks in UK using PEST analysis. The political environment in UK is in general friendly to Starbucks though government is a little unstable in times of economic recession. UK has a highly regulatory environment which means lower cost for business.
The UK-US relationship remains strongly tied. The economic environment in UK is a little unpleasant. It has not yet recovered from last year’s economic crisis. The GNP growth is static and unemployment rate is high. Disposable income drops as the inflation increases. In the socio-cultural environment, the obesity population is increasing so people are becoming more health consciousness, changing their diet to more fabric and vegetables and less fat and sugar. Moreover, the population in UK is on the rise all these years due to UK’s decreased restriction on legal immigrants.
As to the technological environment, UK always plays the role of vanguard in technological development. It offers a fast wireless network almost everywhere even in Coffee shops. And the speed of technology transfer in UK is fast. (Shown in following table) |Political |Economic | |Highly regulatory environment |Static GNP growth | |Friendly UK-US relation |High inflation | |Government instability |Low disposable income | | |High Unemployment | |Socio-Cultural |Technological | |Increased population |Wireless network in coffee shops | |Changing diet habits |Fast technology transfer speed |.
2) Five forces analysis of the industrial drivers Five forces analysis is a tool to audit the competitive environment. It can help organizations find out the industrial drivers for their changes. According to Porter (1998), it is important for an organization to look at five areas of competition before it develops feasible strategies to gain competitive advantages, which are the threat of substitute products or services, the threat of the entry of new competitors, the intensity of competitive rivalry, the bargaining power of customers or buyers, and the bargaining power of suppliers.
The five forces are clearly showed in the following picture. [pic] (Source: Porter, Competitive Strategy, Free Press, 1985) Applying the five forces analysis to Starbucks in UK can help to find out the drivers for changes in its competitive environment. The first force is competitive rivalry. Starbucks in UK has several big competitors, such as Costa, Coffee Republic, and Caffe Nero. The intensity of competition is fierce. Though Starbucks excels other competitors in many ways, recently, due to Costa’s quick growth and Caffe Nero’s focus, Starbucks in UK loses some market shares.
The second force is threat of new entrants. There are two kinds of new entrants. One is some native small coffee shops which are on the brewing to take a share of this high profit margin coffee market. And the other is international giant coffee chain stores, such as McCafe which is planning to provide coffees in McDonalds throughout the world. The third force is threat of substitute products or services. The biggest threat is from tea. Years ago, when Starbucks first appeared in UK, people were enchanted by it and changed their habit of drinking afternoon tea to drinking coffee.
But as people become more and more conscious of their health, they are reducing their coffee drinking and converting to their old tradition of drinking tea now. The other substitute products are various soft drinks and bottle waters. The fourth force is bargaining power of suppliers. The price of coffee bean is on the rise. The bargaining power of suppliers is increasing especially when UK authorities mandate coffee shops to use coffee beans from some specific sources.
The fifth force in bargaining power of customers. The major customers of Starbucks are young students and business people. Since its targeted customers are in a narrow range, the bargaining power of them is consequently strong. (Starbucks, 2009) Value adding in Starbucks 1) Business resources of Starbucks Business resources indicate inputs put into a firm, such as capital, equipment, skills of employees, finance and patents etc (Barney, 1991).
It includes tangible and intangible resources within an organization which can be used to pursue the organization’s chosen strategy and goals and it usually has four categories (Priem and Butler, 2001): first, financial resources which concern the ability of the organization to use existing funds and to raise new funds, second, human resources which equal to the skill-base of the organization, third, physical resources which cover wide range of operational resources such as production facilities, marketing facilities, and information technology, fourth, intangible resources which usually include brands, reputation, intellectual property.
Starbucks is the world’s number one specialty coffee retailer. In UK, the biggest market in Europe, it still keeps leadership in financial performance. Thus, it has a greater financial reach than practically all of its competitors. It not only is abundant in existing financial funds but also can quickly raise funds when necessary. Starbucks is also sufficient in human resources. In Britain, it has over 500 stores employing more than 5,000 workers. It has a strong research and development team as well as highly trained front line service workers.
As to its operational resources, Starbucks can still stand out. To ensure its high quality of coffee, Starbucks has to establish topnotch production facilities. To expand its business, Starbucks has to catch up with the latest marketing facilities and technological developments. For instance, in September 2009, Starbucks in UK rolled out free Wi-Fi at most of its outlets. In terms of intangible resource, it is the core strength of Starbucks. It has strong brand, good reputation, and plenty of patents.
However, its reputation in UK is declining due to some sensitive controversies like its restless exploitation of farmers and workers. 2) resources, competences and competitive advantage While resources are single discrete skill or technology, competence refers to a bundle of skills and technologies by utilizing various resources (Saloner, Shepard and Podolny, 2000). The specific kinds of resources and competences are shown in the following figure. | | | |Necessary |Unique | |Resources |resources | | | | |Threshold |Core | |competences |competences |.
*Provide the basis to outperform competitors or demonstrably provide better value for money (Source: Johnson, Scholes and Whittington, Exploring Corporate Strategy, Prentice Hall, 2005) Based on the previously described resources of Starbucks, it is easy to distinguish Starbucks’s necessary resources and unique resources. The necessary resources are financial resources and human resources, because though Starbucks is better in them than other small competitors, compared with big rivals like Costa, Starbucks has no advantage.
In terms of operational resources, Starbucks has better marketing facilities and technological facilities, but they are not very difficult to imitate. So, technically speaking, Starbucks has unique resources only in production facilities which can provide high quality coffees and brand which is strong worldwide. As to the competences of Starbucks, its abundant financial resources and franchising business model together allow for its quick penetration of UK market. Its R & D resources as well as production facilities combined to enable it to provide innovative and high quality coffee drinks.
Besides, its powerful brand together with skillful personnel shapes Starbuck’s distinctive competences in store ambience. Obviously the first competence is threshold competence because all big coffee chain stores are capable of penetrating market fast. The second and the third are core competence. Competitive advantage is a way by which an organization can make money and sustain its position against its competitors by leveraging its resources and competences (Barney, 1996). Based on the analysis of the resources and competences of Starbucks, the competitive advantages Starbucks has are brand, innovation, high quality, and ambience.
3) Value chain analysis Value chain analysis means examining the activities within and around an organization and relates them to an analysis of the competitive strength of the organization (Porter, 1985). Those activities can be shown in the following chart. [pic] (Source: Porter, Competitive Strategy, Free Press, 1985 ) In a word, those activities that can either save cost or increase profit are value adding activities; on the contrary, those activities that add costs or obscure financial performance are value destroying activities. In Starbucks, there are many value adding activities including primary activities and support activities.
For example, in its primary activities, Starbucks deals only with cooperative suppliers of coffee beans in or out of UK, thus reducing the cost of inbound logistics and guaranteeing the high quality of coffee bean; the coffee production process in Starbucks is standardized which can increase the production speed and save money; in addition, Starbucks uses module production to increase efficiency and realize customization; and it develops three channels of marketing: special channel for airlines, direct channel for mail ordering, and retailing channel in UK.
In its support activities, every Starbucks shops are decorated in exquisite and unique ways which can attract more customers; Workers in Starbucks are always enough so customers can be provide with a good and immediate service; the use the high technology of Wi Fi in every stores adds another attraction to Starbucks. But value destroying activities also exist. In primary activities, Starbucks sprouts out in almost every corner of UK. The proliferation sharply reduces it from a vogue to a common.
In support activities, the workers especially the waiters and waitress work overtime frequently with low payment. This can hurt Starbucks’s reputation and thus affect its sells and revenues. Sustainability of Starbucks’s strategic position The strategic position of an organization is mainly determined by the strategic advantages gained by that organization. How sustainable is the strategic advantages defines how sustainable is the strategic position.
Because a firm is able to use its resources and capabilities to obtain strategic advantages does not mean it will be able to sustain it (Hitt, Ireland and Heskisson, 2001). There are two factors to measure the sustainability of strategic advantages of an organization: durability and imitability. Durability is the rate at which a firm’s core competencies depreciate or become obsolete and innovation can always make a competitor’s product obsolete or even irrelevant (David, 2001).
Imitability is the way in which organization’s core competencies can be copied (David, 2001). The previous analysis shows that Starbucks gains strategic advantages through differentiation. So, the evaluation of Starbucks’s sustainability of its strategic position goes to two issues: the durability and imitability of its differentiation. Starbucks differs itself from other competitors in two aspects: best quality and innovative products and excellent and unique service.
It ensures the best quality of its coffee drinks through the procurement of best coffee beans in the world and the highly standard production process. The competitive advantage of providing the best quality coffee drinks is neither durable, because technological development always makes the product quality between different organizations similar and difficult to perceive by customers, nor inimitable, because other competitors can easily produce high quality coffees through buying first class coffee beans and standard production process.
On the contrary, the competitive advantage gained from providing innovative products is both durable and inimitable, because it derives from the core competence in R&D research and human resource, both of which can improve across time to outrun the obsolescing and are hard to imitate by others. In terms of Starbuck’s competitive advantage in excellent and unique service, its sustainability is a little complex. Starbucks provides its excellent and unique service through the service skills of employees and special decoration of stores and creation of ambience.
These ways are too obvious to be ignored and any competitors can imitate. But, the effectiveness of these ways largely depends on the brand and reputation of Starbucks, which can be durable and inimitable with no doubt. So, Starbucks’s competitive advantage in excellent and unique service can be sustainable only if it keeps its brand and reputation. It is clear that most of Starbucks strategic advantages are sustainable even though a few are subject to technology and some specific conditions. Conclusion.
Based on the above analysis, the following conclusion can be drawn. First, Starbucks takes a differentiation strategic position through its high quality and innovative products and unique service but with relatively high prices in large market scope. Second, the external drivers affecting Starbucks are in two aspects. The first is the political, economic, social, and technological environment in the UK. The political and technological drivers are positive while the economic and social drivers are negative.
The second is the competitive forces in UK coffee industry including the intensity of competition, the threat of new entrants, the threat of substitute product, the bargaining power of suppliers and customers. Third, the resources in Starbucks are abundant. Starbucks combines its resources to form competences in market penetration, product quality, and unique service. Based on its resources and competences, Starbucks establish competitive advantages in both product and service.
Fourth, the Starbucks’s strategic position is in general sustainable, because most of its strategic advantages are both durable and inimitable even though some cannot hold the test by the two criteria.
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