Starbucks was first established in 1971 in Seattle Pike Place Market, before being bought over by Howard Schultz in 1986. Schultz envisioned Starbucks as a home away from home coffee shop; a 'third place' where people could go to get away from it all. This report will critically analyse the growth strategy employed by Starbucks, how the company used 'positioning' to help develop the Starbuck's brand and gain competitive advantages and finally explore the challenges facing Starbucks today and in the future.
Question 1: Critically evaluate the growth strategy adopted by Starbucks.
For the past few decades, Starbucks has been the most powerful leader in the market for speciality coffee. Starbucks growth strategy has been one of aggressive expansion, creating a cluster of stores first in America, before opening up new stores globally. Strategy according to Johnson et al (2005) is defined as: 'the direction and scope of an organisation over the long term, which achieves advantages in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations'.
This rapid growth strategy appeared to work well for Starbucks, blocking out most of its competition and allowing the corporation to sell premium coffee at higher prices thus increasing their profit margin. Recently Starbucks has seen a decline in share value, as well as a decrease in store sales regardless of new stores being opened in the same location. To be successful, compete effectively and sustain growth, businesses need first to understand the environment and markets in which they operate.
Starbucks growth strategy in the early 1990's was centred on targeting new areas to expand the store based on the area's demography. The largest and most densely populated area would serve as the hub and smaller stores would be opened close by. This Cluster strategy had many advantages for Starbucks. It meant that stores had shorter customer lines and waiting periods, brand awareness was increased without spending extra finances on advertising and delivery and management costs were reduced, as Starbucks would be able to realize better deals with their current suppliers. The disadvantage of such a strategy was that the stores began to compete for sales amongst themselves. There was massive cannibalization occurring of existing stores by the new stores being opened.
Another growth strategy used by Starbucks is based on the Ansoff Matrix. The growth strategies of the Ansoff Matrix, (Figure 1 below), which was first developed by H.I Ansoff (1968), included Protecting/Building the product through Market Penetration; Product Development using existing products; Market Development using new segments and territories and finally Diversification of new products and services.
Starbuck first entered the coffee market using the Market penetration strategy. They were starting off in a new market, with new products and their goal was to gain as much market share as possible, which they did using blanketing technique. In entering the new markets, Starbucks had to differentiate their product in order to gain the competitive edge needed to continue expansion.
Market development was their next strategy to increase market share. They began widespread expansion, seeking untapped segments of the domestic market, with high population density. Thorough market research undertaken aided management in asserting where their target groups were located, as well as the suitability, feasibility acceptability of the new markets. Geographic expansion soon followed, with Starbucks opening new stores first in Canada, Asia and the rest of the world. Starbucks gained a first-mover advantage in Asia as the market was still in its developmental stage there. Starbucks also formed alliances with other companies in order to boast sales and gain market share. They joined with Barnes and Noble bookstore and Marriott Hotels to exclusively sell their coffee.
Starbucks they began improving their existing market share with new and newly adapted products, through product development. They introduced a wide range of cold caffeinated beverages, including 'Frappacinos', and other flavoured coffee related drinks. These new products introduced led to longer waiting times for customers as baristas had to work harder to prepare the speciality drinks. They also introduced 'grab and go' coffees, kiosks in office buildings and drive-through windows which helped increased speed of delivery, but sacrificed conversations with baristas and customer recognition. Customers also complained of paying premium price for an express product that could be bought cheaper at their competitors. This threatened the image and identity of Starbucks as a 'third place'.
Diversification was also employed by Starbucks. This was a high-risks growth strategy that worked for the company. Here the company moved into unknown territories, branching away from the speciality coffee industry into the music industry. Starbucks launched it record label Starbucks Entertainment and has been successful in recording with artists such as Paul McCartney, Andrea Bocelli and Kenny G amongst others.
Starbucks has also used competitive strategies based Porter's Generic Matrix to grow their business. Porter (1985) asserted three basic businesses strategies that organizations may employ to gain that competitive advantage and become an industry leader. These strategies included: overall cost leadership, differentiation and focus (see Figure 2) - and a company performs best by choosing one strategy on which to concentrate. The strategy adopted by Starbucks in order to gain a competitive advantage is that of differentiation. This strategy sought to provide product or service benefits that are different from those of competitors and are widely valued by customers (Johnson et al 2005).
Since, the product or service is unique; this strategy provides high customer loyalty (Cross, 1999). When an organisation is able to differentiate its product from that of other competitors, it is able to charge a price that is higher than the average price in the market place. (Porter, 1985). A major advantage was that by using this strategy Starbucks emphasised why customers should buy from their company rather that its competitor. The disadvantage of this strategy according to Lynch (2006) is that:
- It is difficult to estimate whether extra costs incurred from the differentiation strategy can be recovered from the customer by charging a higher price
- The successful differentiation may attract customers to copy the differentiated product and enter the market segment. (Examples are Dunkin Donuts and MacDonald's).
Question 2: Ries and Trout (1986) suggest that 'Positioning is not what you do to the product. Positioning is what you do to the mind of the prospect'. Discuss and evaluate this statement in relation to the development of the Starbucks brand and their use of the extended 'service sector' marketing mix to create competitive advantage.
Positioning may be defined in terms of how a brand is positioned in the mind of the consumer with respect to the values with which it is differently associated or which it "owns" (Ries and Trout, 1982). Good positioning gives you the focus required for your organizational development and your strategic endeavours.
Brand identity is the reality and uniqueness of an organization's products, which is integrally related to its external and internal image and reputation according to Gray and Balmer (1998). It is the configuration of words, images, ideas and associations that form a consumer's aggregate perception of the brand. An identity is not what a marketer creates, but what consumers perceive has been created (Upshaw, 1995).
Branding is when a specific name or symbol is used to distinguish a seller's product or service (Lynch 2005). It is not about the customers choosing your product over the competitor's, but ensuring that they see your company as the best provider of that product, and so will continue to support your company. Brands add value to the product and denote what the company stands for. Starbucks has established itself as "one of the most valuable global brands", through hard work, attention to detail, customer experience and ethical decision-making. (Theodore 2002, p. 62).
Starbucks has done this by driving their sales through the company's image and reputation, without the use of aggressive advertisement. Starbucks began with a good positioning strategy fixed into their mission statement. This was that they would "apply the highest standard of excellence to the purchasing, roasting and delivering of fresh coffee" (www.starbucks.com). Starbucks concentrated on delivering their promise to their customers and that delivery of the promise of value led to creation of their brand. Thus it can be seen that the brand identity of Starbucks actually originated from their positioning strategy and helped the company in differentiating itself and gaining preference and a competitive advantage. Starbucks had to design an appropriate marketing mix that would meet their target market's requirement in order to ensure a sustainable positioning strategy.
Kotler (2005) advances the marketing mix as a set of controllable, tactical marketing tools that a firm blends to produce the response it wants from its target market. It includes everything it can do to influence the demand for its product and consists of, what is commonly referred to as the 4P's. Product this is the totality of 'goods and services' that the company offers the target market. Price describes what the customer pays or is willing to pay to acquire the product. Place means all the company's activities that make the product or service available to the customer. Starbucks vital marketing strategy was the ability to capture prime real-estate to open new stores. Promotion, which include activities that promote the merits of the product and persuades target customer to buy it. This framework was extended by Booms and Bitner in 1981 to include; Process, Physical Evidence and Participants.
Starbucks has interweaved the extended marketing mix into their branding and positioning strategies to help gain a competitive advantage by focusing on customer experience and employee training. In 'high-contact' services such as Starbucks, in which there is inseparability (production and consumption takes place at the same time), participants play an important part in influencing consumers' perception about the product. Starbucks has utilized employee training programs, offered health-care coverage and also introduced the employee stock ownership plan, 'Bean Stock', allowing employees to purchase company shares, and thus increasing employee loyalty.
Physical evidence as depicted under the Booms and Bitner framework is also important for Starbucks. The company's image is built around offering a 'third place' to customers, thus the perceived quality of the stores décor and location is intrinsically related to product quality in the mind of the consumer. The process is made up of the procedures, mechanisms and flow of activities needed for the product to reach the customer (Boom and Bitner, 1981). Queuing and delivery times are very important and need to be accepted by the customers for positioning to be successful.
In order to ensure that the brand is managed properly, relationship marketing is employed. According to Berry and Parasuraman (1991), 'relationship marketing concerns attracting, developing, and retaining customer relationships'. It refers to all 'marketing activities directed toward establishing, developing, and maintaining successful relational exchanges' (Morgan and Hunt, 1994). Relationship marketing tends to concentrate on customer retention, and as evidenced by authors such as Fornell and Wernerfelt (1987) and Reichheld (1996), retention is less costly than new customer acquisition. Internal markets reflect how the organization communicates within itself and is an integral part of relationship marketing. Starbucks needs to strengthen its internal markets and reposition itself if it is to regain lost market shares.
Question 3: What are the major challenges Starbucks now face and how could consumer trend insights help? Recommend and justify what actions Starbucks need to take to revitalise the brand.
With the numerous changes occurring in the market for speciality coffee, Starbucks is facing some major challenges. The first and main challenge affecting Starbucks is increased competition. In recent years there has been an explosion of coffee bars around the world, all boasting of offering the best quality coffee. Although Starbucks still dominates the market, of late there has been a reduction in sales and profit growth, due to the fact that new entrants erode market share and profitability. With companies such as Dunkin' Donuts and MacDonald's offering inexpensive regular coffee, as well as speciality coffee of similar high standards, market share of Starbucks is falling, an indication that regular coffee is beginning to meet the needs and taste of the coffee customer base.
The current economic situation has been a major hazard for Starbucks. With demographic changes on economic growth leading to changes in consumer incomes, sales of Starbucks coffee began to fall. Decreases in the average incomes of consumers mean that people will now see speciality coffee as an expendable luxury good. Luxury goods are those in which the demand decreases as level of consumer incomes fall (Sloman, 2005).
Another challenge facing Starbucks is changing consumer lifestyles and trends. With the increasing rate of use of the Internet and other personal computing devices, there is now a larger proportion of the workforce who prefers to work from home. Since Starbucks once thrived on the idea of it being a 'third place', away from home and the office, it now faces the challenge of repositioning itself in the hope of boasting falling sales.
Changes in market concentration and market saturation have also triggered major challenges for Starbucks. Low market barriers has led to the speciality coffee industry becoming saturated with new suppliers claiming to be the best. Ease of imitation and copy-cat behaviour has also swamped the market, making consumer choice much wider. The price discounting techniques of the new firms offering speciality coffee that is more affordable has lead to the current target market moving to the competitors. Market concentration for Starbucks coffee is also changing. Starbucks has concentrated on targeting the younger, high earning market for so long, that it has neglected the bigger market segment including older people that can be developed, especially with an aging population in countries like Japan and China, which it is trying to penetrate.
Another threat facing Starbucks is 'high supplying power' (Porter, 1998), held by Starbucks suppliers of raw input material. Starbucks gets its quality coffee beans from Brazil and Ethiopia, but has only few suppliers of milk and paper. Starbucks needs to expand the number of suppliers they have in order to reduce the suppliers' power to change prices charged.
Consumer market trend insight can aid Starbucks in overcoming some of the challenges they are now facing by giving a greater understanding into the needs and wants of consumers and any lifestyle changes. An example of this is the growing trend towards high-energy drinks and teas, which may be used as a substitute for coffee. If Starbucks understands fully the implication of this and is aware of consumer switching, then they may be able to compensate this loss by offering similar products being demanded by consumers.
In order for Starbucks to revitalize their brand they must first reassure customers that their positioning promises of high value, quality coffee still exist. Starbucks need to slow down their rapid expansion strategies within the US and reduce excess capacity by closing down under-performing stores. This will aid Starbucks in concentrating on realigning the successful stores with the goal and culture of the organization. The reduction in the number of stores also reduces the cannibalization that is presently occurring, and provides capital for the company to reinvest in the flourishing stores. Starbucks needs to increase its global competitiveness by concentrating on finding the right marketing mix for its international operations instead. Strong international presence aids in brand recognition and strengthening of the brand.
Another way that Starbucks can revitalize their brand is by rebuilding trust. Without trust in a product, there can be no brand loyalty (Light and Kiddon, 2009). Starbucks's promise of a 'third place', where customers could sit and relax with a cup of high quality coffee, was somehow lost in its goal of rapid expansion and along with it, its customer loyalty. Starbucks needs to prove once again that it can provide great quality premium coffee and not the diluted product they now offer if it is to regain its market share.
Starbucks needs also to reposition their product in line with consumer needs and rethink their pricing strategy. Starbucks should consider differential pricing while considering targeting different market segments. There is a wide range of segments that remain untouched and not researched by Starbucks. Advertising issues needs to be addressed here as well. Starbucks is in the Maturity stage of the product life cycle and needs to increase its advertising efforts in order to boast sales and reinvent itself.
Starbucks can once again regain its market share and become the brand recognised for premium coffee, but it has to implement the strategic changes discussed above. Only then will the company be able to reposition themselves is a market that has become saturated and increasingly competitive.
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