SHMS

The Starbucks Case

A critical evaluation of the strategy

Coursework 2 Hospitality Operations Management

7HO008Mr. Stephan Earnhart

Mischal Menden

Student Number: 100202950

11/12/2010

Abstract

The purpose of this paper is to critically analyze the operational strategy of the Starbucks

company. This will be done by applying the Ishikawa diagram and the 5-why method. The

major pains faced are Timeliness and Service, which both lead to the same root cause, that

Starbucks has lost its soul. Furthermore by benchmarking similar operations like, McDonalds

and Ritz-Carlton, improvement processes will be suggested, and by implementing the FIT

SIGMA Quality Management strategy by Basu and Wirght (2003) appropriate control and

empowerment will be implemented. In the implementation part, the author will explain how

the highest quality can be achieved and controlled by using the DMAIC wheel of Six SIGMA

Quality Management.

Contents

Abstract..................................................................................................................................................2

Introduction...........................................................................................................................................4

Aim and Objectives.................................................................................................................................5

Methodology..........................................................................................................................................5

Findings and Analysis.............................................................................................................................6

The Pain..............................................................................................................................................6

The Remedy......................................................................................................................................11

The Implementation.........................................................................................................................14

Conclusion............................................................................................................................................19

References............................................................................................................................................20

Appendices...........................................................................................................................................23

Appendix A.......................................................................................................................................23

Appendix B.......................................................................................................................................24

Appendix C.......................................................................................................................................25

Introduction

What is operations management? According to Naylor (2002), operations management is

looking at the creation, operation and the control of transformation systems, which takes

inputs of a wide range of resources and generates goods or services (outputs) demanded by

customers. Furthermore he determined that operations management involves all the

functions of an organization. Meredith and Shafer (2002) stated that operations

management consists of a huge variety, i.e. customer satisfaction and competitiveness,

controlling inventory. Part of operations management is the transformation system, where

inputs are transformed into outputs. Meredith and Shafer determined four major ways

where value can be added within the transformation process: Alter, transport, store, inspect.

In addition, all these different ways of adding value can be combined. When looking at the

Hospitality sector especially into the Hotel business; raw goods are produced or altered,

afterwards stored and then transported to the customer home (banqueting). Krajewski and

Ritzman (2005) pointed out that operations management is a process that transforms inputs

into services/ outputs and products. It is of great importance in ever Industry, especially in

the hospitality sector. The authors stressed out five components of operations management.

Coordinating

Communicating

Controlling

Planning

Commanding

The purpose of this paper is to critically analyze the operational strategy, while looking at

quality management and customer satisfaction, by using different analytic tools like the

Ishikawa cause and effect diagram and the 5 why´s method by Toyoda (1930). Johnson

(2008) pointed out, that an operational strategy is the third and last level of a company’s

strategy. It is focusing on how the different segments of an organization deliver the

corporate- and business-level strategies effectively, while looking at resources, processes

and people. Furthermore the determination of the root cause, which causes the main

symptoms within the organization, by looking at the pareto rule, Ishikawa cause-effect

diagram and the 5-why method by Toyoda. Additionally to come up with a new strategy and

an implementation plan.

Aim and ObjectivesThe aim of this paper is to critically analyze the operational strategy used by the Starbucks

Company and propose an alternative strategy.

The objectives of this research are as follows:

To analyze and point out the strategy implemented by the Starbucks company and

stress out the weaknesses within.

To determine to root cause, faced by Starbucks, by using different analytic tools

Implementing a new strategy how the previously determined root cause can be

overcome and properly maintained

MethodologyThe methodology used in order to obtain appropriate data and meet the aim and objectives

previously stated is focused on secondary data collection. According to Saunders et al.

(2007), it is data which was previously collect and/ or analyzed focusing on a different

purpose. In this assignment the author retrieved his data from the Swiss Hospitality

Management School Library, as well as from the Emerald and Ebsco database, in order to

provide a wide range of source and enhance the validity of the statements. The philosophies

applicable for this research are of scientific nature, as well as social science nature. The

epistemological background used for this paper, is based on secondary research,

constructivism. According to Collis and Hussey (2009) constructivism aims to generate new

knowledge through the usage of already existing knowledge. The limitations within this

research are, the availability of data (secondary research), furthermore estimations

according to their current situation as well as strategy had to be done, in order to provide

necessary data.

Findings and Analysis

The PainThe strategy of the Starbucks Company is divided into three major factors. The coffee sold

needs to be from the highest quality. Achieving this Starbucks has a high control of the

supply chain, not only to cut down cost, but also to ensure the quality. The supply chain

management used, incorporates the cooperation with the coffee bean growers, buying

green coffee beans in order to control the custom roasting process and furthermore control

the distribution to its retail outlets. According to Horvath (2001) supply chains can be

identified as two or more independent companies working jointly together in order to create

a higher value and receiving greater success in customer satisfaction on the one side and

profit on the other. The second component of the strategy is the service factor. As Alling

(cited in Moon and Quelch, 2006) stated, “Our goal is to create an uplifting experience

everyday you walk through our door.” To ensure the high quality service they implemented

the “Just say yes” policy, which empowers their partner (employees) to provide the best

service, and do whatever needs to be done in order to make the customers happy. The last

main component is the atmosphere. Day (cited in Moon and Quelch, 2006) pointed out that,

“People come for coffee, but it is the atmosphere what makes them stay. Supporting this

Schultz (cited in Moon and Quelch, 2006) said, “It´s based on the human spirit, it´s based on

a sense of community, the need for people to come together.” Combining all the three main

components of the strategy Moon and Quelch (2006) stated that, Starbucks is creating an

experience around the consumption of coffee, an experience that people would weave into

the fabric of their everyday live. Supporting this Koehn(2010), stressed that Starbucks wants

to create a “Coffee experience”. When looking at the `how´ it can be pointed out that,

Starbucks is only opening outlets in high density areas, furthermore they provide their

customers with opportunity to customize their products on the needs of every individual,

the employees working at Starbucks are eligible to stock options and health insurance. In

order to maintain a high motivation Moon and Quelch (2006) pointed out that, “Manager

stability is the key- it not only decreases partner turnover, but it also enables the store to do

a much better job of recognizing regular customers and providing personalized service. In

those points it differentiates itself from its competitors, since no other coffee shop is focused

so hard on the customer satisfaction. Owin (cited in Koehn, 2001) stated that, “In the longer

run, it is what distinguishes us to our customers …The most enduring competitive advantage

we have is that we are able to give our customers a better experience at store level…than

any competitor we have out there.” In order to apply the pareto diagram, as shown below,

the author created a strategy map, according to Kaplan and Norton (2000) in Appendix A.

Mission

Finan

cial

Customer

Operational

Employe

e0.00%

10.00%20.00%30.00%40.00%50.00%60.00%

Series1

From this diagram it is obvious that the most symptoms are possible to occur from the

operational part. Although in order to apply the pareto rule of 20/80, the author took into

consideration also the mission and the employees as shown in the table above

The pains faced within this strategy will be mapped out with the Ishikawa (cited in Gwiazda,

2006) cause and effect diagram.

Amount Percentage

Mission 20,00% 1 6,67%

Financial 20,00% 2 13,33%

Customer 20,00% 2 13,33%

Operational 20,00% 8 53,33%80,00

% 25%

Employee 20,00% 3 20,00%

High density

Self-canabilization

Money driven

Lost their soul

Just say Yes

Lack of research

Younger customers

Quality

Customer connection

Handcrafted bev.

Value for money

„3 Minutes“ speed

Coffee machinesCustomized bev.

Timeliness

Customer unsatisfaction

Timeliness

Customized bev.

Has lost its soul

Value for money

Coffee machines

Change of market

SVC

Connection to customers

Service

Coffee machines

High densitylocation

Hourly wagedemployees

Money driven

Younger customers

High Quality

Pricing

Coffee machines

High densitylocation

Value for money

Market change

High Quality

Quality

Coffee machines

Handcraftedbvg.

Hourly wagedemployees

Younger customers

Demotivated

Employees

Coffee machines

Loss of taste

noisy

Value for money

speed

Equipment

Customized bev. Has lost its soul

Change of market

SVCConnection to customers

Marketing

Timeliness

Has lost its soul

Value for moneyChange of market

SVC

Connection to customers

Customer

Fair trade

Has lost its soulSVC/Gold Card

Connection to customers

Public Relations

Strategy

Ishikawa,cited in Gwiazda, 2006

The pains determined in the Ishikawa diagram can be identified as being symptomatic.

Supporting these Luck et al. (1978 cited in Butler 1994) stated that the diagnosis of the

symptoms will actually lead to the problem which needs to be solved. From the diagram

above and with applying the pareto rule of, 20% of the pains cause 80% of the symptoms,

the author points out that Service and Timeliness are the two major pains within the

Starbucks company.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

PricingEquipmentEmployeesQualityTimelinessServiceMarketingCutomerPublic RelationsStrategy

Major Pains Percentage Amount of symptoms PercentagePricing 10,00% 6 30,00%Equipment 10,00% 5 25,00%Employees 10,00% 5 25,00%Quality 10,00% 5 25,00%Timeliness 10,00% 8 40,00%Service 10,00% 8 40,00%Marketing 10,00% 5 25,00%Cutomer 10,00% 6 30,00%Public Relations 10,00% 4 20,00%Strategy 10,00% 6 30,00%

In order to determine the root cause and if there is a relationship between the two

symptoms faced, the author applies the 5 why method by Toyoda (1930).

After analyzing the two main pains, evaluated through the Ishikawa diagram, the author

comes to the conclusion that Starbucks lost its traditional idea and strove away from two of

their main strategic points: The service and the ambience. Supporting this Schultz (cited in

Ritson 2007) said in a memo to the company, that the global chain of coffee shops is growing

too quickly, thereby threatening to commoditize it. Furthermore Schultz (cited in Moon and

Quelch, 2006) stated that the main idea was the creation of a coffee house which will

become the “third place”, beside home and work, for his customers, where they can relax

and enjoy coffee with others, or just by themselves. Silva (cited in Day, 2003) pointed out

Timeliness

3 Minutes per order

Increase throughput

Generate more Money

Inc rease profit

WHY?

WHY?

WHY?

WHY?

Service

Less recongnition„3 Minutes“

Higher throughput

Increase profit

Generate more Money

WHY?

Away from the traditional idea of building a coffee place to enjoy and relax, where customers can socialize, to a coffee empire. More focus on generating money and increasing throughput, but missing the aspect of excellent quality. Toyoda, 1930

that Starbucks is not taking the most out of the coffee experience, they sell a social

experience. A place where people come together, read the paper and/or share some kind of

coffee, with milk or ice cream.

How can the Starbucks improve their quality and through that the customer satisfaction?

Hoyle (2006) defined seven major components of quality which include: A degree of

excellence, conformance with requirements, the totally of characteristics of an entity that

bear on its ability to satisfy stated or implied needs, fitness for use, fitness for purpose,

freedom of defects, delighting customers. Furthermore he (Hoyle, 2006) stated, “A product

that possesses features that satisfy customer needs is a quality product.” Moreover, when

considering price and quality, Hoyle (2006) stressed out that in case the price out of the

customers reach, it will not be considered. Looking at the McDonalds Company (cited in

acrele, 2010), which newly introduced in their high density locations a quick-order terminal;

it is obvious that the market research done by this particular company is better used as in

the Starbucks cooperation. Supporting this Day (cited in Moon and Quelch, 2006) said, that

Starbucks is great at measuring and collecting data, but the there is a lack in the ability of

using this data for making the right decisions, which is closely related to the fact that there is

“no real” marketing department. The quick-order terminal would be a great invention for

their high density locations, not only to increase throughput, but also to give the barristas

more time to interact with the customers, who do not choose to order over the computer.

The Remedy

Metters, King-Metters, Pullman and Walton (2006) stated that the competition at the

present time is highly intense and it is difficult for companies to differentiate themselves

from other, as well as that companies which are creating an exceptional experience for their

customers will be successful.

Concluding what was analyzed before, the author suggest the implementation of a quick-

order terminal, furthermore a new quality control would be of great use. As Schultz (2008)

stated in an interview with CNN, “We need to put ourselves in the shoes of our customers.”

The theoretical framework suggested by the author is FIT SIGMA according to Basu and

Wirght (2003). This theoretical framework includes the quality control of six SIGMA as well

as Lean SIGMA and goes even further in putting everything into one consensus. Supporting

this Basu and Wirght (2003) stated that the Ishikawa and the 5-why method are appropriate

methods to analyze the root causes in order to establish a proper quality management.

Combining FIT SIGMA and the customer, it can be pointed out that it focuses on what the

customer wants and needs. Applying this to the Starbucks Company, it is obvious that in

different locations they will have implement different systems in order to meet the target

markets demand. The quick-order terminal might not be appropriate for a shop which is

located in a mall in the United Arab Emirates, since customers in general have more time

and sit down for their coffee, whereas when situated at an airport or business center, this

innovation might be of great use. Furthermore the terminal can be linked to the SVC card

and programmed accordingly, so returning customers do not always have to select their

drink, but will be provided with the a selection of their most ordered beverages and meals.

This data could be used to define, which beverages are mostly ordered and adjustments can

be made accordingly. Moreover the already existing beverages can be pre-adjusted to the

customer demand. Supporting the previous stated, Basu and Wright (2003) pointed out that

the intention of FIT SIGMA are to define the needs and wants of customers, in terms of basic

requirements as specification, time and cost. In addition, this theoretical framework focuses

on appropriate resource utilization, which includes, when talking about the service industry:

People, information technology, equipment and machines, time and information. Basu and

Wright (2003) stressed that for any organization which wants to achieve increased service at

little or no cost, require a special culture. Applying this to Starbucks, the barristas or

associates have to be selected carefully in order to achieve this specific culture, looking at

the Ritz Carlton selection process of employees, a lot can be learned and copied (Sucher and

MacManus, 2005). Specifying this statement, Ed Starros stated (cited in Earnhardt, 2010),

that only five out of one thousand applicants will get a job. But not only the recruitment and

selection process of the Ritz-Carlton Hotel Company might be of great use, also the training

process. As Sucher and MacManus (2005) described, the training of the Ritz-Carlton is not

only focusing on the providence of appropriate knowledge, but also constantly checking the

effectiveness, after a period of three weeks and if a lack is determined providing extra

training where needed.

Constraints faced while doing so are, that the selection process of employees is very cost

intensive, furthermore might the quick-order terminal not be applicable for all outlets. On

the other hand implementing FIT SIGMA as quality control would enhance the sensitivity

towards customers Howard Schultz wants to achieve.

The Implementation

Implementing the new computers would give the barristas the time necessary for interacting

with their customers. Additionally Zeitham et al. (cited in Brown et al. 2001) indentified five

dimensions of service:

Tangibles: the appearance of physical facilities

Reliability: the ability to perform the promised service dependably and accurately

Responsiveness: the willingness to help customers and provide prompt service

Assurance: the knowledge and courtesy of employees and their ability to convey

trust and confidence

Empathy: caring, individualized attention that the firm provides for its customers.

These values have to be communicated throughout and become part of the employees and

the company´s everyday live. In order to ensure the highest level of customer satisfaction,

which equals to quality as previously determined, Deming´s fourteen points of quality should

be implemented and controlled with DMAIC circle of the Six SIGMA improvement process.

1. Create consistency of purpose towards improvement2. Adopt the new philosophy3. Cease dependence on inspection to achieve quality4. End the practice of awarding business on the basis of the price tag5. Improve constantly and forever the system of production and service6. Institute training on the job7. Institute leadership8. Drive out fear9. Break down barriers10. Eliminate slogans, exhortations and targets for the workforce11. Eliminate quotas12. Remove barriers that rob managers their right to pride in craftsmanship13. Institute a program of education and self-improvement14. Put everybody in the company to work to accomplish the transformation

Basu and Wright, 2003

DefineMeasureAnalyseImrpoveControl

This theoretical framework of implementing the FIT SIGMA quality control

is an adaptation from Deming’s fourteen points of quality

by Basu and Wright. To ensure full implementation of

the new quality management strategy, every employee

needs to be able to use the DMAIC wheel of improvement.

Starting with defining opportunities, every employee needs to able and encouraged to

establish and define customer requirements. Continuing with the measurement step, which

includes the determination of what needs to be measured as well as establishing a plan for

the data collection process. This part will be done by the quick-order terminal where

applicable. In locations where this terminal cannot be introduced, barristas need to be

encouraged in creating a database for their regular customers. The analyzing process is the

proactive tool in order to determine root cause according to the previously collected data.

Improving the process is the next step, where according to the previously evaluated causes

and pains a new way will be implemented, preferably suggested by the front-line employee.

Hence, the front-line employees and store managers know what is possible. The Control

process includes the development and execution of a pilot test as well as implementing the

process and controlling it accordingly. This wheel in can be applied every section of the

company in order to achieve full quality control and at the end a quality product. In order to

implement all these stages successfully, a Gantt-chart needs to be created and

communicated throughout, so all employees know what is going to happen next. Supporting

this Borysowich(2008) pointed out several advantages of using this Project-Management

tool: it’s an excellent presentation tool for pointing out groups of milestones and

timeframes, great status reporting due to visibility. Furthermore, the same author stated

Basu and Wright 2003

some limitations or constraints faced by using this matrix; the timeframes are based on

estimations, does not address the interrelationship between jobs or tasks, difficult to

illustrate critical path, as well as difficulty in showing resource based assignments. Although

this matrix might have some disadvantages in the application process, it is an appropriate

tool to illustrate what needs to be done, in which time frame. Furthermore, updates are

easily made and timeframes can be readjusted.

Quick order terminal for starbucks

01.12.2010

Tasks Start Date Duration Days left End Date Follow up

Re-engeneering the Terminal 01.12.2010 21 21 22.12.2010 11.12.2010

Pilot testing it (lab) 22.12.2010 14 35 05.01.2011 29.12.2010

Setting up the terminal in a low density location (test) 05.01.2011 2 37 07.01.2011 06.01.2011

Feedback from the customers 10.01.2011 14 54 24.01.2011 17.01.2011

Feedback from the employees 10.01.2011 7 47 17.01.2011 13.01.2011

Evaluating the data generated 24.01.2011 3 57 27.01.2011 25.01.2011

Adjust the menu 27.01.2011 2 59 29.01.2011 28.01.2011

Setting up the terminal in a high density location (test) 05.01.2011 2 37 07.01.2011 06.01.2011

Feedback from the customers 10.01.2011 14 54 24.01.2011 17.01.2011

Feedback from the employees 10.01.2011 7 47 17.01.2011 13.01.2011

Evaluating the data generated 24.01.2011 4 58 28.01.2011 26.01.2011

Adjust the menu 28.01.2011 2 60 30.01.2011 29.01.2011

Implementation 01.02.2011

Week1 Week2 Week3 Week4 Week5M T W T F S S M T W T F S S M T W T F S S M T W T F S S M T W T F S S1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 1 2 3 4

Testing-Phase

Week6 Week7 Week8 Week9M T W T F S S M T W T F S S M T W T F S S M T W T F S S5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 1

Re-e

valu

ating

IMP

From the Gantt-Chart, it is obvious the amount of time and money which needs to be

invested, in order to make the quick-order-terminal a success. Although after implementing

it, the Return on Investment in terms of customer satisfaction and loyalty might be worth

the risk. Therefore 3 different tests have been described, which have to be evaluated

individually as well as collectively.

Of course every shop should be the same, but every coffee store is also in a different

location and provides beverages and meals for different customers with different needs. The

key to success is differentiation, but not only in the way how customers are treated, but also

Gantt, cited in Adam, 1998

the way how business and its employees are treated, especially in the days of internet

community sites like facebook or twitter, where mistakes are published before they are

made. Only if highest quality is ensured in every sector/field/department of the

organization, the Starbucks Company can achieve their aim of being the number one coffee

shop, and the third place, apart from home and office, for their customers. (Bailey, 2010

cited in immoderate, 2010)

For further explanation, the author of this paper mapped out a new strategy, according to

Kaplan and Norton, in Appendix B.

Conclusion

The author is convinced that the aim and the objectives which were stated previously have

been fully achieved. The root cause has been determined and justified by reviewing different

literature and case studies. Furthermore was a new approach to the current quality

management strategy suggested, FIT SIGMA, and implementation according to Deming´s

fourteen points of quality. Moreover, did the author benchmark two different companies,

McDonalds with its quick-order terminal, and the Ritz-Carlton Hotel Company with their

recruitment process, and applied these tactics within the Starbucks Company. Justifications

have been made where necessary and appropriate. The suggested theoretical framework

was criticized and evaluated. Concluding now what has been previously stated it is obvious

where Howard Schultz needs to tackle the pains faced, on the current strategy.

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Appendices

Appendix AMission

Financial

Customer

Operational

Highly motivated staff High Value for money

Hourly waged Stock options and health insurance

Promotions only from within

To be the 3rd place for customers, after work and home.

Revenuethrough loyalty Growth strategy

A specific target group, people who have money

Hihg customer loyalty and satisfaction

High Qualityproducts

Timeliness„3 Minutes“

Quality service

No need of marketing

State of the art equipment

PR through Fair trade

Employee

Appendix B

Mission

Financial

Customer

Operational

Employee

Quick-order-terminalInteraction with customers

High efficency

Selction and Recruitment process

Skilled and motivated staff

Proper trainingcontinous training

To be the 3rd place for customers, after work and home.

Growthof Revenue

Higher throughputEstablishment of a

coffee house to relax, enjoy and socialize

High customer loyalty High customer satisfaction Fast order and fast delivery„3Minutes“promise

Distribution of the waiting line

Delivering highest quality

Recognizing `regulars´

Adjustment of menus

Analyzing the data

Customized Beverages

Health insurance Stock options

Kaplan & Norton, 2004

Kaplan & Norton, 2004