Strategic Management

Student’s Name

Institution

TABLE OF CONTENTS TOC o “1-2” h z u HYPERLINK l “_Toc372858459” TABLE OF CONTENTS PAGEREF _Toc372858459 h 2

HYPERLINK l “_Toc372858460” Introduction4

HYPERLINK l “_Toc372858461” Pre Analytical Work4

HYPERLINK l “_Toc372858462” Local Expansion5

HYPERLINK l “_Toc372858463” International Market5

HYPERLINK l “_Toc372858464” The Grocery Market5

HYPERLINK l “_Toc372858465” Problem/Issue Identification6

HYPERLINK l “_Toc372858466” Sub Problems6

HYPERLINK l “_Toc372858467” Compound Problem8

HYPERLINK l “_Toc372858468” Internal Analysis8

HYPERLINK l “_Toc372858469” External Environment9

HYPERLINK l “_Toc372858470” SWOT Analysis11

HYPERLINK l “_Toc372858471” Strengths11

HYPERLINK l “_Toc372858472” Weaknesses13

HYPERLINK l “_Toc372858473” Opportunities13

HYPERLINK l “_Toc372858474” Threats14

HYPERLINK l “_Toc372858475” Alternative Analysis15

HYPERLINK l “_Toc372858476” Recommendations16

HYPERLINK l “_Toc372858477” Implementation Plan20

HYPERLINK l “_Toc372858478” References24

Introduction

Pre Analytical WorkStarbuck is an American based outdoor coffee drink company that went down in its performance in the market in 2008 because of problems that affected its Strategic management between the 1997 and 2008. I will be analyzing the problems that dogged the company within this specified time frame as a member of the board of directors with a view of presenting my findings to the Board of directors. The main decision to be made will be about changing the strategic management of the company. The main problem that would be tackled is the set of actions and decisions designed by the company management to formulate and implement its long term strategic goals.

Strategic management can be defined as a set of actions and decisions whose consequence is the implementation and formulation of plans that are designed to obtain a company’s long term strategic goals. Since it involves complex, long term and future oriented decision making it requires a lot of resources and the involvement of top management. However, most managers are usually not trained on how to leverage their decisions to avoid negative consequences.

Howard Schultz and Starbucks senior management were very much committed to the company’s strategic plan. It was perceived that Starbuck’s strategic position would permit it to sustain its growth through continuous development of its brand image as well as augmenting its presence in various markets. The company was experiencing a rapid growth and was time and again assessing new opportunities in its international and local retail markets. The future prospective of its mail order business, new specialty sales partners and penetration in the grocery channel were top on its list.

Local ExpansionIt was now focusing on the major regions of every city. Apart from that Starbucks had hoped to reach out to a robust customer base by introducing its new Kiosks or what it referred to as the Expresso Carts. The company succeeded in branding its coffee cart which had previously been a typical brandless grassroots kind of special coffee retailer. Starbucks branded as Doppio its new version of Expresso cart. This enabled the company to capitalize on its sales areas such as malls, train stations and street corners.

International MarketThe company quickly entered the international market in order to stop its competitors from having a head start. Its aim was to capitalize on the rapid desire for western brands. It also decided to capitalize on the high consumption of coffee particularly in Asia. Its focus on Asia pacific stemmed from the fact that it did lack the financial muscle to move into multiple countries at the same time. Apart from that 50% of the world’s population was located in this area. The expectations were that in a period of five years its global business contributions would be great. The company also believed that its products would still do well in places where cold coffee beverages were very marketable. Bottled Frappucino started being offered in virtually all Starbuck retail outlets and was also being distributed through Pepsi Co’s distribution channels.

The Grocery MarketIn an effort to penetrate the grocery market Starbucks was very successful in its test-marketing endeavors at the Portland. It started with the Chicago Market. Its success in Chicago would lead it to a national roll out with the projection that it would have a national coverage in a period of five years.

Problem/Issue IdentificationSub ProblemsThe time spend by Managers on the processes of strategic management could negatively impact operational responsibilities. Managers at Starbuck were not trained to minimize this impact. They spend a lot of time in boardrooms at the expense of implementing strategies on the ground.

If those who formulate strategies are not involved intimately in its implementation they are likely to evade their individual responsibilities for the decisions that are reached. They thus must be grained to limit their promises to performance that can be delivered by individual subordinate and decision makers. Apart from that, these managers must be trained to respond and anticipate the disappointments from subordinates if the company does not attain its expectations. Unfortunately this did not happen at Starbucks. If Managers at Starbucks were sensitized and prepared about feasible negative consequences by their subordinate staff and how to minimize them effectively through a matrix organizational approach they would not have faced the challenges they faced. Unfortunately the top down organizational management did not work out for Starbucks.

Starbuck’s EPS and Stock-price had rapidly increased in a span of five years. Between January and June 1997 four outstanding investment companies had rated it as a buy in their investment reports. In North America Starbucks was faced with a gigantic problem. It owned all of its retail shops rather than franchising them. It was thus faced with the problem of heavily relying on debt financing and equity so as to grow. Most of its major competitors such as the second cup and Seattle’s Best coffee were franchised. This means that they did not require much financing to roll out their stores.

The Supply chain operations at Starbucks claimed to have the best haulage rates in the industry; a multifaceted bakery distribution model, a projection mechanism for the customers that would require coffee and the timing, which was overly very accurate, they had strong inventory systems for the specialty coffee industry and a fully incorporated distribution and manufacturing process that protected the beans from oxygen between their roasting and packaging intervals. Starbucks developed these benefits and skills because it benchmarked against its rivals, strongly believed in the concept of incorporated supply and hired experts.

As customers became more knowledgeable about coffee the company started facing a challenge about getting baristas that could replicate the service, values and culture of the company. Apart from that, the company only dealt with the highest quality products; for instance in terms of manufacturing equipment it made purchases from Bodum, Krups and Gaggia. It also had most of its assessor items bare the company’s logo for instance, storage containers, coffee mugs, coffee filters and grinders.

Starbucks faced the problem of constantly defining its brand image. Its executives felt that this was critical before the company could move on to launch its brand leveraging activities and national advertising campaigns. They felt that they do not leverage their size well enough. This is because they had strong competition in the local markets that ranged from Seattle’s Best coffee to Caribou to the second cup in Canada. They wondered how their rivals were so competitive in their local market yet their national leverage was bigger.

Compound ProblemThe company attempted to maximize efficiency while eliminating redundancy by building its supply operations. Supply chain operations saved four of its businesses; wholesale channels, the specialty units, the retail stores, the grocery channels and the mail order business. However, its Vice President Ted Garcia complained that these business units were a challenge to the company’s supply chain operations. It was now becoming difficult to support four business units in a cost effective, integrated, efficient and effective way. Starbuck had become too ambitious it had bitten more that it could chew. Indeed there is a difference between expanding and growing. The company did not differentiate the two.

Internal AnalysisThe simultaneous evaluation of a company’s profile and its external environment enables it to identify a probable interactive attractive opportunities. These opportunities could be possible investment avenues. However for their potential to be realized they should be screened through the company’s mission to create a set of probable desired opportunities. Speed is an important requirement in today’s global environment. One way in which it can be enhanced is through allowing decisions to be made at the lowest level in an organization. However, Starbucks restricted its decisions to be made at the management level which worked to its disadvantage.

Policies tend to be broad and come before decisions are made, for they substitute or guide for time sensitive or repetitive decision making by management. It is therefore imperative that Starbucks should have created policies that would have guided and authorized its Managers and subordinates thinking process, actions and decisions in order to effectively implement the company’s strategic goals. This is because company policies more often than not increase the effectiveness of managers and subordinates through standardizing their routine decisions while expanding or empowering managers and subordinates discretion to implement business strategies.

In an attempt to refocus, restructure and reengineer the company it is imperative that strategic management process should have taken an internal focus to ensure that work is done both effectively and efficiently. However, the intense competition in the market worked against Starbucks.

External EnvironmentSocial factors affecting the company involved the lifestyles, beliefs, opinions, values and attitudes of individuals in the company’s external environment. Social factors are usually dynamic in nature since they are determined by the customers’ capacity to satisfy their cravings. Women have become very great consumers of beverages however, the company failed to create products specific to this cohort of consumers.

Politically in formulating its strategies to move into the Asian markets the company never visualized the instability that rocked the Arab countries. This destabilized its businesses in the Asian countries by a big margin. Technologically to avoid being obsolescence the company got involved in the acquisition of state of the art equipment from very expensive sources. However, they did not do a thorough technological forecasting to realize that they were in a turbulent growth industry. They needed to realize that they needed to comprehend the existing technological advances as well as the future advances that could affect their products. Acquiring expensive state of the art equipment that is likely to change its modifications in a year’s time is not prudent.

Competition in the industry was there to help the company grow, however the company viewed it as a threat and started opening up many shops instead of franchising them as was the case with its competitors. The company did not understand the underlying economics that were rooted in the industry’s competition. Its competitive nature did not go well with its combatants in the industry. This is because substitutes, customers, potential entrants and even suppliers are likely competitors that actively affected the company in the long-run. In an effort to get a position in the market where the company could effectively and efficiently defend itself against competitive forces the managers stretched too far, and when the shops costs started cutting on their profits their performance started nose driving.

The industry was open there were no threats of entry and every new comer was gaining ground in the market. While the company benefited from its economies of scale it did not plan well on its expansion strategies. The company capitalized on its economies of scale to differentiate its products, however by putting the company logo on other unnecessary equipments that was going too far, most of its money was being spend on peripherals that were not needed. These trivial expenditures if added up amounted to millions of dollars that would have been spend on something else. Brand identification is enough on mugs and plates but not on cleaning equipments for they are not used by customers.

The company needed a lot of capital to sustain its investments in ensuring that it generated at least 30 stores per month. This in the end started working against it since its managers and brokers on the ground needed their salaries while the stores were not forthcoming. The company needed capital not only to sustain the shops but also for absorbing its start up losses, customer credit and inventories. While it was doing so its rivals were franchising and there were no barriers for entry.

SWOT AnalysisStrengthsSeveral consumer trends led to a sudden rise in the popularity of specialty coffee in the late 90s. These include: People suddenly adopted a liking for luxuries they could afford and specialty coffee was amongst them, Alcohol was rapidly being replaced with coffee as Americans started adopting healthier lifestyles, Coffee bars started offering avenues where individuals could meet.

Shifts in the consumption of specialty coffee were predicted by analysts in the fall of 1999. At this point in time 81% of specialty coffee was being sold by groceries. However, it was projected that they would be selling 46% by 1999. These changes would see specialty stores selling most of the coffee. It was projected by the specialty coffee association that 10,000 stores would be available in Canada and the USA for coffee retailers by 1999.

Starbucks ended 1996 on a high note with 1000 stores in 32 markets in the entire North America. It had also gained two additional stores in Tokyo. With more than 20,000 devoted employees the company was generating opportunities daily for millions of customers globally to enjoy its Starbucks taste. From hiring the most talented Managers to selecting the finest Arabica Starbucks was devoted to applying the highest quality standards in all its chain activities. They were dedicated to offering memorable experiences for their customers. This was regardless of whether they drunk their coffee in the United Airlines, walked into their stores or opened a mail order package.

Starbucks was excited about the future’s global possibilities as more and more customers embraced its brand. Its meager with Pepsi Cola in 1994 had redefined its category in the development of ready to drink coffee products. By so doing it had established a platform for greater product innovations and even looked forward to bringing onboard other partners such as bottle Frappucino. In 1996 the company purchased and installed a modern proprietary roasting and manufacturing equipment to form a world class manufacturing and logistics organization. The company’s specialty marketing and sales teams had progressively created new distribution channels. A robust American online Starbucks stores had been launched by the company’s direct response group. By so doing the company continued steadfastly and progressed towards its long term strategic goal of being the most respected and recognized coffee brand in the world.

Starbucks sustained a close relationship with its exporters through fostering a direct working relationship. High quality coffee exporters became anxious to be on the list of Starbucks suppliers because it had become the number one purchaser of the highest quality of coffee in the world. The company had a very cordial relationship with its suppliers so that if a supplier had only one container of coffee he would rather take it to Starbucks than to any other company.

Additionally, the company invested in a lot of research through roasting its coffee in various ways under several distinct time conditions and temperatures to ensure that it got most of the beans contents. It is these trial and error sessions that enabled the company to build its signature roasting curves which were later turned in proprietary software. The paradigm by which they were developed stemmed from the art. This meant that even if roasters defected to other competitors they would not be capable of duplicating Starbucks signatures. Upon roasting and cooling by air the coffee was instantly vacuum sealed by one way valve bags. This packaging was exclusive in its capacity to guarantee freshness since it permeated gases that were naturally generated by beans that had been freshly roasted out without letting in oxygen.

WeaknessesStarbucks was overstretching and overextending in its quest for growth. Many are the times that Howard Schultz the CEO and Chairman of Starbucks turned down calls from a number of investors including McDonald’s who had been petitioning for positions to serve Starbucks coffee. He refused to franchise right from the beginning.

The patterns by which coffee was consumed over the years had changed in the US. While in the 60s and 70s people consumed two to three cups per day of coffee this had drastically dropped to 1.7 cups. This drastic drop has been attributed to poor product pricing, development and packaging by the leading coffee manufacturers in the industry. In the 80s specialty coffee did not just compete with basic coffee for sales rather it also competed with other coffee and non coffee related drinks such as alcohol, tea, soft drinks and juices. Specialty coffee was divided into non flavored and flavored coffee however it is the latter that represented 25% of all specialty coffee that was sold. It was flavored with a number of concentrations in the roasting phase. Some of these flavors included: raspberry, hazelnut and amaretto.

Starbucks grew while its number of A sites in A markets continued to decrease the company faced a very incomparable challenge. This was to relentlessly motivate staff in its real estate to continue generating more than 30 stores per month. Star Bucks had to ensure it deals with this challenge if it was to realize its dream of obtaining 2000 stores by the year 2000. Contemporarily, Starbucks was focused on the retail store business on every fundamental North American city; expanding at the expense of growth.

OpportunitiesThe company’s retail sales had become its primary growth vehicle. For most customers Starbucks was not only a location where they could meet and drink coffee rather it was essentially an experience. It was an avenue that offered incredible coffee related drinks in a theatrical atmosphere. That hinged round an Expresso machine. Customers got more than just fine coffee at Starbucks they got great people, sound advice on how to make home made great coffee, first rated music, and an upbeat and excellent rendezvous.

The company’s formula was firmly entrenched in its innovativeness, its coffee, its merchandising and its employees, its image and its real estate strategy. Its employees were derived from colleges or universities and after receiving a great deal of training were capable of talking about several distinct processes and coffee. The intention of obtaining baristas that were knowledgeable stemmed from the fact that most of Starbucks customers were increasingly becoming knowledgeable about coffee.

The company perceived itself to be real estate opportunistic; it never waited for perfectly designed locations. It had design teams that could fit its locations in various retail places be it a triangle, a corner or a trapezoid. This flexibility, apart from its notion of clustering stores enabled the company to optimize its share in the market where it occupied various city locations while building a regional standing. It had 20 estate managers to enable it meet its strategic goals.

ThreatsSecond Cup was fundamentally a franchiser; it had franchised 90% of virtually all its locations. Consequently the company was flowing in cash on a constant basis. It also had the advantage of taking a few operational risks at the store level. Traditionally, Second cup was based in the malls; however, it had started moving into more stand alone locations in the 90s. These locations tended to be established more quickly and were never always on prime real estate. In its retail niches, the second cup offered snack items, specialty coffee drinks, flavored coffee and varietals.

Second cup became more growth oriented, and had a liking for growth through acquisitions. Gloria Jean’s locations were one of its prime acquisitions; they numbered 247 in the US alone. These in addition to its own 243 stores posed a considerable threat to Starbuck. Second Cup thus became the second largest player in the industry. This arouse from the fact that Gloria Jean’s obtained most of its sales from coffee beans and coffee mugs related items. In the last few years coffee cup had become very active in the formation of alliances with other food companies. By partnering with Cara operations, Second cup hoped to gain access to several of its partner’s retail and institutional sites for instance Swiss and Harvey’s. Apart from that Second cup had a 30% stake in the Great Canadian Bagel which had 120 operational stores by 1996 and was projected to expand to 175 stores in 1997. Apart from that, it had been given a tender to serve coffee on Air Canada flights. As a matter of fact its 1996 revenues were more than $60 million.

Alternative AnalysisThe simultaneous evaluation of Starbucks profile and its external environment will enable it to identify probable interactive attractive opportunities. These opportunities could be possible investment avenues. However for their potential to be realized they should be screened through the company’s mission to create a set of probable desired opportunities while fitting with the company’s goals. Speed is an important requirement in today’s global environment. One way in which it can be enhanced is through allowing decisions to be made at the lowest level in an organization this will ensure that the company uses the lowest time possible to break even. However, Starbucks restricted its decisions to be made at the management level which worked to its disadvantage. It is therefore prudent that it now changes track and adopts the bottom up decision making approach.

Policies tend to be broad and come before decisions are made, for they substitute or guide for time sensitive or repetitive decision making by management. It is therefore imperative that Starbucks should create policies that would guide and authorize its Managers and subordinates thinking process, actions and decisions in order to effectively implement the company’s strategic goals within the shortest time possible to break even. This is because the company policies are likely to increase the effectiveness of managers and subordinates through standardizing their routine decisions while expanding or empowering managers and subordinates discretion to implement business strategies.

In an attempt to refocus, restructure and reengineer the company it is imperative that strategic management process should take an internal focus to ensure that work is done both effectively and efficiently using the available resources in order to gain profits. This is because the potential of Starbucks realizing profits is greater than fitting in its management culture.

RecommendationsThe Chosen alternative that the researcher proposes should be implemented by the Company is:

The simultaneous evaluation of Starbucks profile and its external environment will enable it to identify probable interactive attractive opportunities. These opportunities could be possible investment avenues. However for their potential to be realized they should be screened through the company’s mission to create a set of probable desired opportunities while fitting with the company’s goals. Speed is an important requirement in today’s global environment. One way in which it can be enhanced is through allowing decisions to be made at the lowest level in an organization this will ensure that the company uses the lowest time possible to break even. However, Starbucks restricted its decisions to be made at the management level which worked to its disadvantage. It is therefore prudent that it now changes track and adopts the bottom up decision making approach.

Starbucks should determine and assess the competitive advantages that offer its customers the basis for distinguishing it from other reasonable options. Since the company has a dominant product line it should choose within its grand strategies on how to guide its activities especially when attempting to decide on widening its scope beyond its main activities. This can be done by the workers at the bottom level rather than wait for board room discussions that take long to implement.

The company can leverage its competitive advantage by using its cost structures to differentiate its competitors. If the company has more than one source of capability that enables it to lower its operational costs it would be able to outperform its rivals. The company should start franchising its retail outlets rather than owning them for this is an expensive venture that cuts its profits. The employees at the bottom level can determine if it is the right time to expand because they have hands on approach in the business and feel the environment more than boardroom managers. It is this expansion without proof of profits that brought down the company.

There is an ardent need for Starbucks to re-evaluate its cost business leadership opportunities. This is because it needs to achieve one or more of its value chain activities in a more cost effective way than that of its competitors by configuring its value chain to obtain cost advantages. The company should assess the sustainability of its low cost leadership advantages by benchmarking its value chain against that of major competitors and considering the impact of cost advantages on the company’s business competitive advantage. The company’s managers while assessing opportunities to build competitive advantage should relate strategies to value chain activities, resources and capabilities that exploit rapid response, low cost and differentiation competitive advantages. This could be achieved by getting daily reports from employees on the ground to ensure that their ears are on the ground. In the end this would help them not to make blind strategies.

Since the industry’s rapid growth has brought new competitors to the market that have considerable resources and are therefore large competitors, Starbucks should thus be emphatic about product differentiation and the recognition of its brand. It can obtain competitive advantage from its financial resources to sustain heavy marketing expenses. If the company scales up production to meet growing demand it could place a premium on its capacity to adopt production and product design facilities which would in the end ensure it effectively meets an increase in demand.

However, it is critical to note that if Starbucks increases investment in Research and Development (R&D) as well as equipments and plants without having effectively met increased demand this will place a huge demand on its capital resources. The company should not expand without leveraging its current position. The only way it can be sure that it has effectively met increased demand is through daily feedbacks from the employees on the ground rather than waiting for the reports to be availed through boardroom meetings on a quarterly basis.

The company should also consider adopting a matrix organizational structure. This is because Starbucks being a large company its increased diversity is likely to lead to project and product efforts that are likely to have critical strategic significance. The consequence of a matrix organizational structure is the provision of organizational forms that offer resources and skills when and where they are considered to be very vital. In this organizational structure staff personnel and Managers are assigned to both a product or project manager and a fundamental functional area. The matrix form is likely to make use of talented employees within Starbucks through combining product and project specialization with merits of functional specialization.

Apart from that, if Starbucks employs the matrix structure it is likely to see an increase in the number of its middle managers that exercise management roles in general. This is because their exposure to the company’s broad strategic concerns is likely to be widened. It is this matrix structure that will also ensure that the company leverages on the input of employees on the ground thus ensuring that it is guided by concrete evidence rather than using Wall Street skeptics.

Starbucks should also consider outsourcing some of its activities in order to gain competitive advantage over its rivals in the market. This is because outsourcing is likely to lower the costs the company incurs when certain activities are done in house. In addition the amount of capital that the company invests in production is also likely to be considerably reduced. This will in the end enable the company’s management to now focus on the company’s critical mission activities. In the long run this will enable Starbucks to augment and manage the source of its fundamental competitive advantage. The cautious selection of its outsourced partners will enable Starbucks to potentially grow its capabilities through ideas emerging from the rapid scope of work and expertise done by the outsourced companies. This will also ensure that the bottom up approach is facilitated in the company.

Even thought the company had little or no control over environmental factors in the industry they exercised substantial influence over its fundamental strategies. Consumer demographics, inflation, regulations, technology and interest rates all affected the company in one way or the other. The company made a lot of strategic assumptions over the industry barriers to entry, competitors, product substitutes and suppliers, when the company started tracking all these portfolios it suddenly became unnecessarily time consuming and expensive. It is therefore important that Starbucks Managers should choose only premises that are likely to have a fundamental effect on the company and its strategic plans. This will avoid a situation where they open shops and they are not able to maintain them.

The company should also engage in strategic surveillance, this is because by doing so it will be able to monitor a wide range of occurrences within and without the company. Apart from that, critical and not anticipated information could be uncovered through monitoring several sources of information. The employees on the ground would come in handy in this area to ensure that the company does not expand without concrete evidence.

Finally, drastic events are likely to trigger intense and immediate r