Case Overview

Starbucks is one of the largest chains of coffee shops in the world. They started their business in the early 80s as a tiny chain of Seattle coffee shops, grew rapidly in the 90s and now own 5,689 coffee shops in 28 countries. This chain of coffee shops is very well managed by a well seasoned management team popularly known as H2O, because of Howard Schultz (Chairman and Chief Global Strategist), Howard Behar ( Head of North American Operations), and Orion Smith (CEO).

Although, the company has expanded enormously, since it went public in 1991 but has also encountered a number of problems. The problem it faced had it mounted in home and abroad. The company had its success through the baby boomers in the 90s, but now the Generation X is not liking the environment of the shop and the young generation feel out of place in the coffee shop, above all the price of coffee seems to be little expensive to them.

The Starbucks did not have much competition like Mc Donald’s and the likes in the initial days but now they have competitors such as Tully’s coffee shop. They also had problems of employees’ discontentment. The expensive and aggressive marketing strategy has given Starbucks market dominancy. They earn $181.2 million in the year 2000, sales were still growing but it started growing in a decreasing rate, because their aggressive strategy and attitude towards competitors not only they grew rivalry with local business people but they lost customer. It was difficult for them to maintain their growth of 20% only on domestic market. So, they opted for going overseas. They maintain some aggressive attitude in other countries also. The largest overseas market of Starbucks was in Japan when they had 368 shops, UK was their second largest overseas market, and by the end of 2001 they started operation in the Middle East. They want to have 10,000 outlets abroad by next three years. In the domestic market they repositioned themselves adding internet service, fast food etc. to maintain their profit. In Japan their profit started declining during 2001.

The Starbucks need readjust their strategies and reposition them to rise from the fall.

Q1. Identify the controllable and uncontrollable elements that Starbucks has encountered in entering global markets.

Controllable elements altered in the long run business in the foreign market. In common, the controllable elements usually are the marketing mix consists of price, place, products, and promotion. These elements face the same problems or almost similar with Starbucks domestic market. As the name - ‘STARBUCKS' and its logo can be adjusted in order to adapt into one cultural tastes and expectation. Pricing of their products are reasonable with the foreign current rates and also their overall country income. The progress of market research is to understand and determine the right international locations which can fit in Starbucks products.

There are also some which occurred to be uncontrollable elements to Starbucks organization itself in entering global market. The political, economy and cultural issues in the foreign countries can occurred at any time and therefore, these are few elements which take into consideration when Starbucks trying to adapt into the foreign market. At any time, the foreign countries governments may change their fiscal and monetary policies which caused sudden change in Starbucks operation and with so, this given a big impact on Starbucks. As an example, during economic depression country like Japan, revised in customers' income and pulled down which caused Starbucks in losing instead of gaining profit or sales due to the coffee pricing. Besides, the increasing competition among rival shops in and natural disasters like SARS, H1N1, and etc disaster Japan might put Starbucks in risky business development. Fluctuations in world currency rates are one of the factors when Starbucks transform their profit to their home base market currency. In country such as France, Starbucks have to adapt into France's regulations and generous labor benefits which is legal and compulsory in order to enter into France market. In country like Vienna, their culture is different from any other country and this is due to the high number of young population who are always enthusiastic about the new things which appear around them and embrace the new. Therefore, the expansions of business of Starbucks in Vienna tend to be positive advantages.

The international marketer must deal with at least two levels of uncontrollable uncertainty instead of one. Uncertainty is created by the uncontrollable elements of all business environments, but each foreign country in which a company operates adds its own unique set of uncontrollable factors.

The controllable and uncontrollable elements that Starbucks has encountered in different markets are described and given in tabular form on the next page:

Q2. What are the major sources of risk facing the company and discuss the potential solutions?

Starbucks faced three major risks at domestic region. One of which was saturated market condition (USA). The main risk is due to the limitation products choices the business growth and customers may get bored of it and tend to switch to others. The market concentrations are more to United State and Canada Fifteen years ago they initially started with 17 coffee shops in Seattle and grown to over 16,000 outlets in 44 countries and amazingly, over 11,000 stores scattered across the United State and Canada itself and there are only 8 states with no Starbucks stores . Now, amazingly 4,247 stores scattered across the United State and Canada. In Seattle there is outlet for every 9,400 people. And the company considers that the upper limit of coffee shop saturation.

Another risk is losing customers, because fewer options are available for the customer. And third risk is less but not the least the young generation (Generation X) feels comfortable. Global expansion poses huge risks for Starbucks.

Potential solutions: Basing on the risks faced by Starbucks, we can suggest the following solutions

Starbucks going abroad, they should focus not only to their core products but also finding ways to improve the quality of their coffee and also the services as well as the environment. Bringing in some other new products helps in fulfill the current demand help in business growth.

The risks that they faced in USA-the risks of market saturation can be overcome in focusing on international or global marketing. They may focus on the fact of reducing employee disruption to increase the quality of service and coffee for which they are well known.

As they were facing ominously hostile reception from its future consumer (Generation X), they should reposition their product according to customers need, so that they find can the $3 they are paying for a cup of coffee is reasonable. They can also change their pricing strategy.

As Starbucks is going abroad to expand its business with local partners of that region their risk of SRC and ethnocentrism. It can be over come through proper adjustment keeping SRC and ethnocentrism away in decision making. Proper fine-tuning are needed so that less mistake which can cost the chances of lost in profitability, reputation and also trust by customers can be minimized.

Q3. Critique Starbucks’ overall corporate strategy.

Corporate strategy is the overall scope and direction of an organization and the way in which its various business operations work together to achieve particular goals. Modern business policies often concentrate on developing international brands and products. But before we develop any product it is important to assess the potential worldwide demand, otherwise the result can be customer disappointment or company’s’ internal dissatisfaction. Now if we take a close look at the corporate strategy of star bucks then we can come up with certain point which from particular view could be criticized.

Excessive market penetration and Self-Cannibalisation:

Starbucks’ main Corporate Strategies is to maximize the market penetration, providing a relaxing and attractive social atmosphere, offers high quality products, create a great working environment and achieve profitability.

So the first point is rapid store expansion strategy which in other hand is called “Starbucks Everywhere” approach. These basically are related on Domestic and International store expansion where everything is about the company, company owned and company operated stores or licensing.

And for expanding market penetration star bucks used to follow the Clustering strategy, which is concentration of a considerable amount of outlets in the same area, even though there was an outlet store already. This is defined in the case study as “self-cannibalization”.

Rather than creating problem they consider this to be advantageous by creating quick domination of the local market and increase the total revenue and market share (Holmes et al, 2002). They believe though at the beginning it creates lose to the previous store but by the middle term it earns more profit than a single store itself did. This worked out to be perfect since the last economic expansion but after that the level of saturation of the US and Canadian market together with the consequences of the current recession, has led the company to close some stores in this markets while increasing the number of outlets internationally.

Previously there were eight states of the US without Starbucks outlets. But now in this situation star bucks should open new store only on those areas where star bucks didn’t reach before and avoid opening stores where it already had .this will prevent stealing its own market share from the previous store and will create new market segment.

Cost cutting and creating employee dissatisfaction:

Secondly star bucks give importance in employees’ training and recognition too. This part is where all the system to recruit, hire and train Baristas and store managers, screening, training programmes and award for partner. On the other hand, real estate, store design, planning and construction are related too. Lastly, is about Store ambience that having the concept of “everything matters” and assessment of standards makes the surrounding better.

Starbucks provides high quality of the service which differentiates them from others. And for this perfect capable employees are necessary. The way the personnel receive the customers and serve them will have a direct impact in the experience of the clients. But maintaining this process is quite costly.

But as the prices of Starbucks' products and services are more expensive than other similar products, further price rising might affect the company's operations. But on the other hand we know that Customers are the most important people for any organisation. They are the resource upon which the success of the business depends. And to treat the customer properly and make them feel special is only possible by providing quality products and if the employees and staffs are well trained and motivated to serve well to the customers. The company has understood perfectly this, and, therefore, have tried to provide the best possible conditions to their staff. For example, according to the case study, even part-time workers were given modest stock options and health insurance, and comparable higher wages than other similar retailers.

If we look at the information provided in the case then we can see Starbucks grew from 17 coffee shops in Seattle 15 years ago to over 16,000 outlets in 50 countries. Sales climbed an average of 20% annually since the company went public; it peaked at $10.4 billion in 2008 before fallen to $9.8 billion in 2009. Profits bounded ahead an average of 30 percent per year through 2007 peaking at $673, then dropping to $582 billion and $494 billion in 2008 and 2009, respectively. The firm closed 475 stores in the U.S. in 2009 to reduce costs.

Therefore in 2007, the company imposed some changes like sharp cost-cuts, new scheduling systems and a sales-orientation for their baristas. And also overtime was an issue. So these changes created dissatisfaction among the present employees and also new potential employees perceived star bucks less like a special place to work which finally affected the coffee and service quality.

Now this is a challenge for the company to create a balance between the fast growth and employee satisfaction.

Challenges in product diversification:

Second point is the Product line. This point is about having a wide range of products choices, special product promotion, selling music CDs and Joint ventures with companies such as Pepsi-Cola, Dreyer’s Grand Ice Cream and Jim Beam Brands.

Starbucks often tried to expand the value of their offering beyond coffee. As coined by a manager of Starbucks some time ago 'We're not in the business of filling bellies. We're in the business of filling souls”. Yet customers when it comes to Starbucks mainly think about coffee.

This could be the answer to why star bucks find it difficult to diversify their products where as other companies for example “Pret A Manger”; a direct competitor of star bucks gets it easy to offer other food products than just coffee.

Low entry briers creating competition:

From porters five force model we know that where there is a low entry barrier the competition is high.Star bucks don’t only operate locally but also internationally which is now increasing more and more. And there is always a risk that while spreading over other countries there a threat of rivalry by other coffee chain shops which is created by low entry barriers in those markets. For these star bucks need to develop their menus and store appearance and also by creating a strong brand image than others.

Q4. How might Starbucks improve profitability in Japan?

Although Starbucks has done well in Japan, the road has not been smooth. To improve the profitability in Japan they might go for following activities.

Repositioning their product and serviceStarbucks can continue to renovate its store and improve the customer services by repositioning the product offerings and services which might improve their profitability.

Providing online services and pre-ordering systemsStarbucks can also provide online services and pre-ordering systems like in US. In Japan as well, the country being a hi-Tech society would definitely have keen internet users.

Creating comfortable environment for the customersStarbucks can create the environment where customers can spend most of their time at the same place in comfort, supply WIFI system where everyone can online for their own entertainment, studies or even spaces for business discussion. These are likely to generate friendly environment where the target market will be widen.

Increasing benefits and restructuring the pricesOne major problem faced in Japan is the growing competition from rival coffee chains which is pulling down its profits. In order to combat that, Starbucks can reposition by increasing benefits and restructure their prices as most of these competitors offer same prices. Starbucks and its competitors in Japan are providing the same fare. As a result, competitors can easily eat up Starbucks’s share. So, Starbuck should either reduce the price or increase benefits in Japan.

Introducing variety of food offerings and non-coffee productsJapanese people also prefer to eat proper food and smoke. So, Starbucks can also improve on provided good quality and variety of food offerings and non-coffee products to attract Japanese customers. In order to come closer to the hearts and souls of the Japanese customers, they should understand the culture of Japan and implement it in their Services.

Other activities They may want to appeal to Japan's younger generation and should be

foreseen as their future customers. Starbucks can introduce various cultural campaign or entertainment campaign

in Japan so that Japanese youth feel attraction to come Starbucks. In times of economic recession extra activities are necessary to boost up sales.

For attracting the Japanese market in addition to coffee, arrangement of internet facility and other amenities should also be provided.

Conclusion

Starbucks has done well all over the world; the road has not been smooth. Factors can lead to success by innovation, providing friendly environment and improved facilities. Since the Company has been concentrating on developing more blends of coffee drinks, Starbucks may have over looked the potential market of different healthy tea drinks. Although Starbucks maintains a top-notch management team, the Company does not seem to have a well organized consumer relations department.