General Environmental Segments that Influence Starbucks the Most
Demographics/Psychographics
Demographics refer to factors concerning the consumers and the environment in which they live, and how the factors can influence their consumption patterns. Examples of demographic factors include: age groups of the population, the direction of affluence, ethnic composition of the population, education levels, variations in income levels, and sense of loyalty to the Corporation (Market Line, 2017). Psychographics reveal the attitudes and interests that the target population has towards the Company’s products. Starbucks’ success largely depends on demographics because factors such as education, attitudes toward the products, and disparities in income determine consumption patterns of the population. For instance, the poorly educated, low-income earners, and the aged are less likely to be potential consumers. As such, regions with populations with unfavorable demographics are likely to bring in lower returns than populations with favorable demographics.
Economics
Economic indicators such as interest rates, unemployment, GDP, net disposable revenue, and the consumer price index determine the productivity of Starbucks and the food and hospitality industry as a whole. High unemployment rates mean that the target population in a given region may not be willing to buy food in hotels. This translates to a low rate of stock replenishment. Starbucks set the prices of its commodities and securities higher than its competitors. As a result, the Company reported a decline in total revenue by the third quarter of 2017 by about -6.1%, which is a quicker overall decline of the Company’s competitors by about 1.1% within that quarter (Leduc, 2017). The consumer price index for coffee has been declining from 200 to 195 in 2017, and the rate of inflation in the US is 1.8 (Leduc, 2017). These factors have led to lower profit margins for companies selling coffee, in which Starbucks recorded a drop in net margin by about 12% (ML, 2017).
Two Forces of Competition Significant to Starbucks
Threat of New Entrants
The threat of new entrants implies that it is easy for new entrepreneurs to enter the coffee market in the US and in any other country that Starbucks operates. It is easy to enter the industry, specifically the coffee beverage business for new entrepreneurs. All that are needed are coffee-brewing machines and the starting capital, which does not necessarily require a huge amount of money because that depends on the business size. Starbucks sets its prices relatively higher than its competitors, which offers an advantage to new entrants in the coffee brewing business (Wei, 2016). This threat poses a big challenge especially in regions with low income-earning populations. Starbucks has countered this threat by improving the quality of its beverage so that it is still more appealing to the customers despite the higher prices than that of the competitors. The Company has also strengthened its brand, diversified its areas of specialization to suit the demand and cultures of specific consumers, increased the number of branches, and subsidized the prices of its products in regions of economic hardship (Wei, 2016).
Competitive Rivalry
Competitive rivalry denotes the competition between Starbucks and other companies that produce similar products. The stiff competition by rivals can be attributed to; the high number of organizations in the same line of business, and low cost of starting a coffee restaurant (Wei, 2016). Competitors such as McDonald or Dunkin Donuts also have a large market share and a big operating capital. As such, consumers can easily opt for them whenever there is no Starbucks store in sight. This is compounded by the fact that consumers can easily switch brands and commodities whenever they wish, especially when there are other substitute products such as tea and smoothies. Starbucks has countered rivalry through venturing into other product lines such as fruit juices and fast foods. The Company has also installed roasteries to offer a variety of coffee flavors such as nitro so as to catch up with competitors who are offering many appealing coffee flavors that attract customers (Kowitt, 2017).
What Starbucks can do to improve its Ability to Address Threats of New Entrants and Competitive Rivalry in the Near Future
The threat of new entrants is a strong force that can also be offset by Starbucks to maintain its competitive advantage. One idea is for the Company to reinforce its CSR strategies in which it will both embrace diversification of employees. This will let employees work at stores located in their residence. When the Company applies diversification in their labor force, it is likely to retain employees who can identify with people of their community who they often see and interact with (Valby, 2017). Allowing employees to work in branches located in their area of residence enables the Company to have a workforce that properly understands the demographics of the particular population. Such employees know the tastes and preferences of the customers and their spending habits, and for their sake, customers can be loyal to Starbucks. As such, they are more likely to be preferred by the customers, which will enable the Company to retain its customers even when there are new entrants.
The most likely way that Starbucks can deal with the threat of competitive rivalry is through innovations, price reduction, and expanding its branches especially in underserved regions. With its large market base and financial capability, Starbucks can expand its branches in the US and oversees strategically to cover communities that have been underserved by the food and hospitality industry (Valby, 2017). Therefore, the Company will move aggressively to outpace its competitors in opening branches in underserved communities. Under the same approach, Starbucks can launch the Community Stores Program (CSP) to diversify its business portfolio when pursuing the expansion agenda into new markets. The CSP can work because employees will feel like they are part of the Company, which will improve the brand image, and help attract new customers.
External Threats Affecting Starbucks and the Available Opportunities
Threats
The biggest external threats affecting Starbucks are: increase in prices of raw materials, intense competition from rival companies, and costs of compliance with government policies (Sisson & Bowen, 2017). The prices of the Arabica coffee keep rising due to factors such as political and economic policies, draught, and cost of production. As such, Starbucks cannot set a fixed price commitment contract with suppliers. This compels the Company to go by the prices that farmers set, which sometimes affects the Company. Competition in coffee specialty depends on product quality, price, and convenience (ML, 2017). Starbucks faces competition from well established companies in the restaurant sector such as Dunkin Brands. Dunkin Brands has strong presence in the North-Eastern US, and trades franchise to independent owners whereas Starbucks relies on building and managing its own stores, which is expensive (ML, 2017).
Opportunities
The food and hospitality industry in the US is expanding, and the restaurant food sales are estimated to be around $800 million in 2017, an increase of about 35% since 2010 (ML, 2017). The expansion is attributed to increase in consumer demand, and economic growth in the US. This has enabled Starbucks to utilize the opportunity to sell more products such as premium Tazo brews, and Starbucks VIA Ready Brew. Starbucks has also expanded its branches abroad in Asia and Africa. The opportunities resulted from the increase in middle class group of people in those regions (ML, 2017).
How Starbucks Should Deal with the Most Serious Threat and the Greatest Opportunity
Starbucks can address the threat of increasing cost of raw materials by working and cooperating with coffee-growing farmers and agronomy experts. Since Starbucks is a big cooperation in all aspects of the business, it has the capability of hiring talented and innovative agronomists to work with farmers to ensure that coffee growers utilize the best cultivation methods possible. The Cooperation can also give loans to struggling farmers to encourage them to grow high quality coffee. The threat of competition can be dealt with through the CSP, and opening stores in underserved regions while maintaining quality. The opportunity arising from the expanding food industry in many parts of the world can be utilized through opening several branches in the most viable regions. For instance, Starbucks can continue to open many branches in India and China where the food and hospitality industry is steadily expanding. However, Starbucks can diversify its products in such regions to suit tastes and preferences of the local population through offering beverages that are more appealing to the locals such as tea in the Chinese market since tea is on high demand in China than coffee (Wei, 2016).
Opinion on Starbucks’ Greatest Strengths and Significant Weaknesses
Greatest Strengths
Starbucks’ greatest strengths include innovative technology such as the Starbucks Card, My Starbucks Rewards, and Mobile Order and Pay. The Cooperation also holds a strong financial position evident from revenue growth in which the compound annual growth rate increased by 11.2% more in 2016 than 2015 (Wei, 2016). The Cooperation also provides value-added services such as entertainment to its customers. The innovative technology enables the retailer to offer consumers bonuses, and allows those without cash to purchase goods without smart cards or cash, which is flexible and convenient to suit all customers. The strong financial position gives Starbucks the ability to expand to new markets, and to improve existing stores. The value-added services that Starbucks offers to in-store consumers such as free Wi-Fi, and the Starbucks Digital Networks that allow customers read news from popular publishers such as the New York Times have the potential to attract new customers and retain existing ones. Starbucks can maximize the strengths by maintaining high standards of quality, and maintaining the offers and bonuses. It should also continue investing in viable regions to expand its market share.
Significant Weakness
The greatest weakness that affects Starbucks is product recalls. There have been cases of equipment and foodstuff being recalled on many occasions. For instance, in 2016, the Cooperation recalled reusable cold-to-go stainless steel drinking straws thereby causing an injury-risk panic to customers (Wei, 2016). In the same year, Cheese and Fruit Bistro Boxes were recalled because the products had cashew allergen. The Cooperation also recalled sausages, eggs, and cheddar in significantly large numbers. Such recalls and many others not mentioned here can devalue the Starbucks brand thereby resulting in low demand for its products. The weaknesses can be fixed through employing technical inspectors who can assess the products at the manufacturing/production stage to prevent defective products from reaching customers.
Starbucks’ Resources, Capabilities, and Core Competencies
Starbucks’ resources include both tangible and intangible properties. They include: assets in 62 countries adding up to 19,767 outlets globally, both licensed and company-operated stores. The company had total revenue of about $14.89 billion in 2013, with a compound annual growth rate of more than 11% ($21.316 million) in the financial year 2016 (Wei, 2016). The Company employs more than 200,000 workers, some of who have been highly trained to operate state of the art equipment, and as baristas. Starbucks’ capabilities include: opening branches in strategic areas such as high-visibility locations in several settings such as suburban retail outlets. The brand is the most recognized globally in the coffee beverage business, and the Company successfully leverages its brand equity effectively by merchandizing and licensing the brand (Thompson, 2017). Starbucks is also capable of maintaining the large-scale operation in more than 60 countries in which it enjoys economy of scale, and lower costs of input.
Starbucks’ competencies arise from HR management practices and organizational culture. Employees enjoy rewards such as retirement and stock benefits. The production system is knowledge-based, which builds an effective cooperate culture. The Starbucks Rewards and Card initiative enhances customer loyalty to Starbucks since it provides convenience, and offers support to customers, which is a significant competency (Foroohar, 2015). Further, the Company has good CSR in which the stores are friendly to the community. The Company hires employees from the local community in which each store is located. It also has CSR initiatives and built goodwill with customers. For instance, the Company offers high quality foodstuffs, and builds brand equity by offering each customer with unique experience through the integration of the local community culture in the local stores (Wei, 2016).
Starbucks’ Value Chain
Starbucks’ value chain consists of primary and support activities. Primary activities include inbound logistics that involve selection of high quality coffee beans from mainly Asia, Africa, and Latin America, which are transported and stored mainly in the US. Manufacturing operations are done in more than 60 countries in licensed stores and company-operated outlets (Warren, 2015). Outbound logistics is done through ensuring that most of the goods are sold in their local stores alone. This eliminates the need for intermediaries in the trading process. Starbucks avoids aggressive marketing. However, it instead focuses on quality and project-based marketing when new products are to be launched and samples are required, in areas near the stores. Customer service is based on quality of the products, which is enforced by the Starbucks Experience. Support activities include infrastructure such as stores that Starbucks has constructed all over the world, the HR management system that invests in employees, technological advancements, and procurement processes. Procurement involves agents travelling to areas where coffee is grown, and establishing relationships with the farmers.
Where Value can be created using Resources, Capabilities and Competence along the Value Chain
Despite the effectiveness of Starbucks’ value chain, it has weaknesses that can be solved by the use of the vast resources, capabilities and competencies. For instance, the procurement process does not have to connect the Company and famers only during harvest time. The Company can use its vast resources to station their agents and agronomy experts in the regions where the farmers plant coffee. This will save the Company cost of the agents travelling from the US to different continents to look for high quality coffee. The agronomy experts will also work with the farmers hand in hand thereby increasing the quality of coffee beans. Further, Starbucks should embrace aggressive marketing to increase its popularity among populations that are not familiar with the brand so as to ensure success when opening stores in unexplored regions.
Conclusion
The two main segments of the environment that affect Starbucks are demographics and economics, and the two most significant forces of the competition facing the Company are threat of new entrants, and competitive rivalry. The Company can deal with these forces through innovativeness, improving quality of its products, and expansion of its stores in unexplored regions. The biggest external threats to the Company include rise in cost of raw materials, intense competition, and compliance with government policies. The greatest opportunity for the company is the growing hotel and hospitality industry.
References
Foroohar, R. (2015). Starbucks For America. (Cover story). Time, 185(5), 18-24.
Kowitt, B. (2017). Howard Schultz has something left to prove. Fortune, 175(8), 114-124.
Leduc, C. (2017). “Onward How Starbucks Fought for Its Life without Losing Its Soul” Book Review.
Sisson, D. C., & Bowen, S. A. (2017). Reputation management and authenticity: A case study of Starbucks’ UK tax crisis and “# SpreadTheCheer” campaign. Journal of Communication Management, 21(3), 287-302.
Market Line. (2017). Starbucks Corporation SWOT Analysis. Starbucks Corporation SWOT Analysis, 1-9.
Thompson, A. (2017). Starbucks Coffee’s Stakeholders: A CSR Analysis. Panmore Institute.
Valby, K. (2017). Starbucks digs in. Fast Company, (218), 78-85.
Warren, K. (2015). Strategy Dynamics Essentials. Strategy Dynamics Limited.
Wei, C. (2016). Marketing strategy for setting up an own coffee shop in China: using Starbucks as a case study.
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