Starbucks' financial recovery and operational restructuring strategy

Starbucks is engaged primarily in the retail coffee shop industry. The company, based in Seattle, operates in dozens of countries around the world, but its primary market is the United States. The company ran into financial difficulties in 2008-2009 with decreased revenue and profits, but has since recovered, as evidenced by its most recent annual results (MSN Moneycentral, 2010). This paper will analyze Starbucks in terms of a number of different operating characteristics, in the format of a research paper, meaning that there will be little discussion of issues or recommendations. Although there are some limitations with respect to gaining detailed information about the proprietary operations of public firms, attempts will be made to address all of the key issues based on whatever evidence is available in the public sphere.

Transition Paragraph

Starbucks had sales of $10.7 billion in fiscal 2010, an improvement of 9.5% over the previous year. This led to record profits of $945 million, up 141.9% from the previous year (MSN Moneycentral, 2010). The company was struggling in 2008, and at that point in time undertook a restructuring program that has brought about the current success. The first element of this program was cost containment, marked by the company's first ever round of mass store closures (Allison, 2008). In addition to the cost-cutting, Starbucks has worked to increase revenues, by introducing new products such as the VIA, which has been a huge success for the company (Fujimura & Firn, 2010) and through expanding internationally. The company opened 236 new stores in fiscal 2008 and a further 89 in fiscal 2009 (2009 Starbucks Annual Report). President of Starbucks International John Culver pointed out in the 2010 earnings conference call that Starbucks sees strong growth in China, Brazil and Russia going forward. Beyond these critical strategic developments there are other elements of the company that should also be examined, and these ancillary elements will be the focus on this paper.

Body

This body includes a wide range of sections, each about a different aspect of the Starbucks company's operations. These include diversity management; ethical, social and legal responsibilities; international business; general planning and strategic planning; organizing work and synergism; organizational structure; work teams utilization; staffing; employee training and development; motivating employees; leadership and management; managing conflict and stress; managing change; controlling; appraising and rewarding; operations management and plans; and operations control. This shotgun approach to analysis will hopefully prove comprehensive when it is all complete, and the conclusion will attempt to filter the useful information and brew it into some eye-opening insights.

International Business

Starbucks is active in international markets in two ways. First, all of its coffee is sourced from outside the U.S., as there are no domestic coffee growing regions. Starbucks sources from all of the major coffee-growing regions -- Latin America, Africa, Asia-Pacific and as a result has strong ties to these regions. From a retail perspective, Starbucks has 47% of its retail stores outside the United States, a total of 7803 stores out of the company's total of 16,635 stores at the end of fiscal 2009. Among company-owned stores, the largest international market is Canada, with 775 stores. This is followed by the United Kingdom (666 stores), China (191 stores), Germany (144 stores), and Thailand (131 stores). However, in some countries the primary business model is through licensing. The leading international market for licensed stores is Japan with 875 stores. This is followed by South Korea (288), China (283), Canada (262) and Mexico (261). Starbucks also has a strong presence in the Philippines, Malaysia, Turkey, the UAE, Kuwait and Singapore. All told international markets account for around 20% of total revenues, as the international segment relies heavily on licensing, which returns less income to Starbucks than company-owned stores (Starbucks 2009 Annual Report).

Strategic Planning

After the struggles of 2008-2009, the company has refocused its efforts on its core strategy plans. The company set out a broad transformation agenda that included improving training, focus on store-level economics, building emotional attachment with customers and restoring innovation. Each of these tactics supports the broad-level differentiated strategy that Starbucks pursues. The strategy is built around several key components -- innovation, customer service and brand-building. The training program supports the customer service element, as does the building of emotional attachments with the customers. Innovation was restored with the introduction of the VIA product, which has done excellent business for Starbucks. The focus on store level economics included closing the underperforming store and ultimately has resulted in a restoration of the company's historic margins.

Organizing Work and Synergism

At the retail level, Starbuck is focused on developing a well-trained workforce that can handle multiple customer service tasks simultaneously. This allows Starbucks to deliver enhanced customer service. There is a high degree of synergy in Starbucks' operations, especially since the 2008 strategic shift that refocused the company back towards its core coffee offering.

Organizational Structure

Starbucks operates a geographic organizational structure, but remains highly centralized. The company's divisions are U.S., International, and Global Consumer Products Group, the latter being focused on licensing arrangements such as that with Pepsi for Starbucks packaged coffee drinks. Each of these segments varies significantly in size. The largest, U.S., is focused around the company's retail presence and is largely run from Seattle. The International segment is divided on a geographical basis, with each country having its own subsidiary. Within the structure of International, there are a number of joint venture partnerships for licensed stores, and this is the preferred method of foreign market entry in Asia. Within GCPG, the organization is divided along product lines. There is no product line division within U.S., nor are there geographic divisions. The organization is rather structured more along functional lines including marketing, information technology, finance, supply chain operations, talent management, and a handful of minor geographic segments. This structure allows Starbucks to operate with a heavily centralized business model, which supports the company's strategy of offering a consistent level of product and service around the world.

Work Teams Utilization

Starbucks does not make strong use of work teams. Many of its projects require the input of primarily one unit -- for example a new licensing agreement in an Asian country would be the responsibility of International. Only when two units are directly involved would there be any coordination between the two, but even then it is limited. The move to source coffee from Yunnan for the company's Chinese stores for example was spearheaded by the Chinese subsidiary and did not involve much input from supply chain or marketing. The centralized structure allows for easy consultation among executives with necessitating work teams.

Staffing

Starbucks employees are dubbed "partners." Staffing is a component of the company's strategy, because the in-store experience is considered by the company to be a source of competitive advantage. Starbucks offers a respectable benefits packages and a positive working environment not only as a means of attracting talent but also retaining talent. The company also has an interest in hiring internally. Staffing is a challenge for Starbucks, however, because of the company's growth rate and the need to maintain high standards of customer service (Weber, 2005). This is why the company emphasizes training to the extent it does, because training and enculturation is needed to support the staffing policy.

Employee Training and Development

Starbucks has an extensive training program in order to ensure that high customer service standards are met. Although Starbucks does not disclose specific figures, it spends more on training than it does on advertising, such is the value it puts on building a quality workforce (Weber, 2005). The training program includes both task elements of the job and enculturation, the latter being a critical component in the training program. Customer service standards are emphasized, and the training program includes situations on dealing with customers, as well as leadership and diversity (Weber, 2005). The latter two are critical to the company's strategy to promote from within to build the management ranks.

Motivating Employees

Although Starbucks has a competitive benefits package, the company relies on intrinsic motivation. Partners are hired and trained based on the idea that giving excellent customer service and achieving excellence is something that should come from within. Enculturation helps to support intrinsic motivation because employees believe in what they are doing and have passion for the job, they will perform at a superior level. As such, Starbucks tries to encourage its partners to view their jobs as a springboard to something important. There are minor extrinsic motivation forms, such as small gifts, that are available to managers, but the focus is on intrinsic forms of motivation at Starbucks.

Leadership and Management

Starbucks is lead by Howard Schultz, who was an early inspirational leader at the company. Under his leadership, the company has defined itself and worked to re-invigorate itself as well. At lower levels, Starbucks offers leadership training to its employees as a means of developing leadership talent internally. The company seeks to develop different levels of leadership, including store level and regional level.

Managing Conflict and Stress

There is no publicly available information about Starbuck's conflict management strategies. The firm in general takes a view towards minimizing public conflict, such as in the Maryland breastfeeding case where the company was targeted by professional activists (AW Page Society, no date). However, for obvious reasons, the company does not publish its strategy for dealing with conflict.

Managing Change

Starbucks has implemented a concerted effort at organizational change over the past few years. The "transformation" process, as the company describes it, consists of several key components. Perhaps the most important component was strong leadership. Change efforts typically do not succeed if they are not supported at the top of the organization. In this case, the CEO drove the change effort, spearheading efforts to launch innovative new products, to reconnect with customers, to control costs and to grow through international expansion. The change effort did not require a shift in corporate culture so much as a renewal of the existing culture, which had been undersold by management for a few years. The change effort began with a strong vision that was well communicated throughout the organization. The company followed through on its vision with a number of critical actions that were directly related to the change effort -- closing underperforming stores and introducing the VIA in particular. These efforts signaled to the rest of the organization that senior management's vision was unified and thus helped to instill a desire to change throughout the entire organization.

Controlling

Starbucks has a number of control mechanisms that it utilizes. Product quality at the supplier level is controlled by professional tasters, who ensure that the beans and the roasts are consistent with Starbucks quality standards. The company also has strong control mechanisms at the staff level. Although in general these are not well publicized there is evidence of a few of the mechanisms utilized. The first is direct communication between the executive level and the store level. Executives have a habit of phoning stores at random and speaking to the employees (Weber, 2005). This creates a direct feedback loop that allows executives to learn about store level operations and store staff to understand that there is direct senior management into their activities. Starbucks also has a secret shopper program, in which the secret shopper tests time, service levels, coffee quality and other aspects of the Starbucks experience (Starbucks Union, 2006).

Appraising and Rewarding

Starbucks employees are appraised on both direct managerial appraisal and on aggregate based on reports from the secret shoppers. The company has a set of metrics for service level and coffee quality that it uses as part of its appraisals. Those who are found to excel at the company's metrics may receive a small reward as incentive. However, the most significant rewards are reserved for those who make Starbucks a career choice, as the company has programs to develop in-house talent, as defined by exceeding service standards and maintaining a long relationship with the company.

Operations Management and Plans

Starbucks has exacting operational standards, against which performance is appraised. To facilitate this, there is a high degree of standardization in the company's equipment and back of house layout. This standardization allows the company's training program to be widely applicable in all of its shops. At the logistics level, operations are supported by a number of warehouses that keep the stores supplied. The company's logistics and purchasing departments are responsible for supporting the retail operations. The company plans to increase its logistics capabilities in accordance with general growth.

Operations Control

Starbucks has sought in recent years to gain more control over its back office operations. This has required an upgrade in information technology investment, particularly with respect to streamlining inventory management. As a result of these investments, the company has improved its inventory turnover from 15 times in 2008 to 19.7 times in 2010. This is evidence of the key role that operations control plays in working capital management and profitability at Starbucks.

Conclusion

Working through the different elements of Starbucks' strategy it is clear that many of the different elements work in conjunction with each other. The base strategy is as a differentiated provider and this is in part supported by the in-store experience. That in-store experience is the product of tight inventory controls, diversity programs in hiring, extensive training, strong leadership, intrinsic motivation systems and controls such as the mystery shoppers.

Each distinct element contributes to the overall organizational output of high customer services levels, which in turn supports the premium pricing that results from the differentiated strategy. For each element of Starbucks' strategy, a wide number of elements support the strategy. The ability of management to tie different elements and tactics together form a coherent strategy is one of the great strengths of successful firms like Starbucks. The company's success begins with leadership and strategy, but these plans must be executed consistently throughout the organization in order to deliver tangible benefit. When this is the case, Starbucks succeeds. A couple of years ago the company had failed to deliver on some of its control mechanisms and this caused difficulty for the company. Once the control mechanisms and corporate culture were restored, Starbucks once again began to excel.

Works Cited:

Allison, M. (2008). Starbucks closing 5% of U.S. stores. Seattle Times. Retrieved November 30, 2010 from http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html

AW Page Society. (no date). Starbucks Corporation: Can customers breastfeed in a coffee shop? AW Page Society. Retrieved November 30, 2010 from http://www.awpagesociety.com/images/uploads/Starbucks_Case.pdf

China Business Daily. (2010). Starbucks brews up Yunnan flavor. China Business News. Retrieved November 30, 2010 from http://cnbusinessnews.com/starbucks-brews-up-yunnan-flavor/

Fujimura, N. & Firn, M. (2010). Starbucks says VIA sales may pass $1 billion globally. Business Week. Retrieved November 30, 2010 from http://www.businessweek.com/news/2010-04-13/starbucks-says-via-sales-may-pass-1-billion-globally-correct-.html

MSN Moneycentral: Starbucks. (2010). Retrieved November 30, 2010 from http://moneycentral.msn.com/detail/stock_quote?Symbol=sbux&getquote=Get+Quote

Starbucks 2009 Annual Report. Retrieved November 30, 2010 from http://media.corporate-ir.net/media_files/irol/99/99518/SBUX_AR.pdf

Starbucks 2010 earnings conference call. Retrieved November 30, 2010 from http://investor.starbucks.com/phoenix.zhtml?p=irol-eventDetails&c=99518&eventID=3462170

Starbucks.com website, various pages. Retrieved November 30, 2010 from http://www.starbucks.com

Starbucks Union. (2006) Mystery shoppers at Starbucks. IWW Starbucks Workers Union. Retrieved November 30, 2010 from http://www.starbucksunion.org/node/1036

Weber, G. (2005). Preserving the Starbucks counter culture. Workforce Management. Retrieved November 30, 2010 from http://www.workforce.com/section/recruiting-staffing/feature/preserving-starbucks-counter-culture/