Starbucks Case Study
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1. In the beginning, how was Starbucks different from other coffee options for coffee drinkers in the United States? What activities and assets did Starbucks leverage to differentiate itself from competitors? 2. When Starbucks was rapidly expanding its store locations in 2006–2009 it made specific changes in order to facilitate that growth. What did Starbucks gain—and give up—as a result of each change? 3. When Schultz returned to Starbucks as CEO in 2008, how had the competitive context changed since his first tenure running the firm? What had caused or facilitated the changes? 4. Why did Schultz respond the way he did to the changes he found in 2008? What was he trying to achieve? Were his responses effective or ineffective? 5. Did the introduction of VIA make sense in light of the market The first Starbucks location opened in 1971. The name Starbucks was inspired by Moby Dick’s first mate. This name and the mermaid logo were inspired by the love of the sea, from Starbucks original location in Seattle Washington in the heart of Pike Place Market.
Starting as a single shop specializing in high quality coffee and brewing products the company grew to be the largest roaster in Washington with multiple locations until the early 80’s. In 1981, current CEO Howard Schultz, recognized a great opportunity and began working with the founder Jerry Baldwin. After a trip to Italy to find new products, Schultz realized an opportunity to bring the café community environment he found in Italy to the United States and the Starbuck’s brand we know today began to take form. Selling espresso by the cup was the first test. Schultz left Baldwin to open his own Italian coffee house, II Giornale, which found outrageous success and in 1987 when Starbucks decided to sell the original 6 locations, Schultz raised the money with investors and purchased the company and fused them with his Italian bistro locations. The company experienced rapid growth going public in 1992, and growing tenfold by 1997, with locations around the United States, Japan and Singapore. Starbucks also began expanding its brand. Throughout the history of Starbucks they have offered the following products: • Offering Starbucks coffee on United Airlines flights.
• Selling premium teas through Starbucks’ own Tazo Tea Company.
• Using the Internet to offer people the option to purchase Starbucks coffee online.
• Distributing whole bean and ground coffee to supermarkets.
• Producing premium coffee ice cream with Dreyer’s.
• Selling CDs in Starbucks retail stores.
Starbucks uses minimal advertising and has grown on word of mouth and brand recognition. According to Garza by 2004 Starbucks had reached 1,344 locations. 1. In the beginning, how was Starbucks different from other coffee options for coffee drinkers in the United States? What activities and assets did Starbucks leverage to differentiate itself from competitors? Starbucks strategy at the beginning was based upon creating a symbolic-expressive value through a social meaning concept of offering the American community meeting places; this positioned its original products and made associations to identify consumers with self-expression providing personal, social and sociocultural meaning. Assets acquired such as Starbucks-branded locations were decorated with detailed patrons to define a symbolic environment focused in giving privileged interactions with specialized staff (baristas) to support status and privilege.
Starbucks focused in assuring supply chain innovation upon differentiation in the coffee tone providing unique flavor products and consistency in the product quality, specialized service and speed. When Schultz took over, he was determined to establish Starbucks as “the third place” beyond home and work. He wanted to differentiate and create a distinct identity of Starbucks and so was not receptive to the idea of selling prepared drinks. He justified it by saying that getting into the “restaurant business” would distract the company from its core assets and activities: roasting and selling coffee beans. The décor of the stores included earth tones and overstuffed chairs, wood floors and cozy fireplaces that created a home-like feel so that its patrons could linger and relax. La Marzocco machines were put up which added to the distinct taste of the coffee and the Barista that operated the machines stood as a unique attraction. The quasi-Italian lingo included in menu (drinks names and sizes) were very catchy. Starbucks positioned itself as a brand/company offering a “lifestyle product”.
The locations were carefully selected where areas with large numbers of wealthy and highly professional workers (“Bobos”) were targeted. 2. When Starbucks was rapidly expanding its store locations in 2006–2009 it made specific changes in order to facilitate that growth. What did Starbucks gain—and give up—as a result of each change? Starbucks made operational changes to facilitate its rapid expansion. First, it changed La Marzocco machines for Verismo models, which were automatic and produced espresso quicker. This reduced the costs of training baristas and reduced the time of the process, so customers were served more quickly. However, some customers argued that the new machines produced lower quality coffee and the customer-barista relationship was lost. Other operational change was coffee grinding. At the beginning, coffee was grounded throughout the day for best tasting. In order to reduce time, Starbucks started shipping pre-ground coffee to its stores. However coffee quality could be compromised by this decision. To lower store-opening costs, Starbucks created four standardized store designs.
This reduced the amount of money needed to open a new store, but there were limited variations so stores couldn’t adapt to specific communities. Also during its phase of expansion, Starbucks concurrently executed two initiatives: (1) Selling Starbucks products through mass distribution channels, and, (2) Dramatically expanding its store locations. By 1996, it had opened about 1,000 stores. By 2001, the count stood at 5,000 stores. In 2007, it was operating about 15,000 stores. This move resulted in a mixed bag of reactions and consequences. Schultz remained undeterred by critics and revealed that in the course of time, Starbucks and its customers realized that their coffee was found filling a need that customers themselves didn’t know that they had. 3. When Schultz returned to Starbucks as CEO in 2008, how had the competitive context changed since his first tenure running the firm? What had caused or facilitated the changes? In general the coffeehouse industry in the United States was experiencing an increase in coffee consumption per capita due to the “Starbucks effect”.
At this time Starbucks was operating approximately 20,000 stores in the United States and was living a fast expansion strategy worldwide. During this time Starbucks was perceived as “heartless corporate predator”. Fast food restaurants such as Dunkin’ Donuts and McDonald’s started offering specialty coffee. MCD’s aggressive advertising with attacks on Starbucks worked in its favor as the coffees were cheaper. The competitive context changed for Starbucks because it’s focus in mass distribution channels and its retail footprint strategy stated its product within a standard performance product value; this affected the value perception of the product. The intensive training process of 2-5 months of Baristas in Intelligentsia shows that the competitors’ worked hard to stress on weak points and opportunities that Starbucks overlooked.
The main cause is that there was confusion with customer base (whether high-end or mass like how McDonalds’s and Dunkin’ Donuts targeted). 4. Why did Schultz respond the way he did to the changes he found in 2008? What was he trying to achieve? Were his responses effective or ineffective? The dawn of 2008 revealed the shoddy condition of Starbucks. It was in crisis. Financial results of the previous quarter were the worst in the history of a public company. January 7, Schultz returned as the CEO and immediately got to work with his Plan of Action. He announced a “transformational agenda” of strategic initiatives. He implemented his decision of closing down 1,000 stores that were not generating an acceptable return despite the operational changes. Closing these underperforming outlets were a part of an attempt to reduce operational costs. In the meanwhile, several smaller initiatives were undertaken. These include-Semi-automatic expresso machines; offering free-refills on the same day of purchases and returning to in-store coffee grinding. A new roast of Coffee called PIKE PLACE ROAST was introduced.
These strategies were an attempt to revive the brand’s sales and chart back in the industry/coffee market. However, all of these strategies did not work and remained ineffective as the stock price of Starbucks declined by half over a period of 15 months since the time of implementation. 5. Did the introduction of VIA make sense in light of the market In light of the market the introduction of a new instant coffee market brand did not make sense because it will lower the expectation of customers to standard coffee distributed thorough grocery channels, lowering the symbolic-value of Starbucks product. But instant coffee was an area of experimentation by Starbucks since 1989. Don Valencia who applied the method of freeze-drying cells to coffee beans, thereby, retaining the quality of the coffee.
In late 2009, Starbucks VIA was launched in culmination of Valencia’s research. VIA, a water soluble coffee was offered in single-serve packages or “sticks”. Schultz’s prediction of VIA creating “additional usage occasions” for coffee and increase sales came true. The quality of VIA was noticed to be similar to that of the traditionally brewed Starbucks Colombian coffee. No one ever questioned the authenticity. The strategy implemented in my opinion was a good one as it was decently priced and called for the need of the hour as they tapped another untouched area which had potential. Conclusion
Overall Starbucks has maintained a competitive advantage since creating its original blue ocean of bringing quality, bistro-style coffee choices to the masses. In order to stay current it will need to focus on its core competencies and avoid spreading themselves to thin. To avoid competitors such as McDonalds and other coffee chains, they will need to create new value innovation by enhancing the customer experience by investing in online content and interactivity. Rather than creating more new products, I think their strength lies in their brand and by enhancing the connection to their loyal customers, they will separate themselves from McDonalds and others.
1) Garza, George. “The history of Starbucks.” Catalogs.com. Catalogs.com. <http://www.catalogs.com/info/food/the-history-of-starbucks.html>. 2) Garthwiate, Craig; Busse, Meghan; Brown, Jennifer; Merkley, Greg “Starbucks: A Story of Growth” Harvard Business Publishing, July 2012.