Starbucks Situational Analysis Environment Important Environmental Factors

¶ … Starbucks

Situational Analysis

ENVIRONMENT

Important environmental factors relating to a firm include economic, cultural and social values, current values and trends, political and legal factors, and environmental threats or opportunities. These elements may impact or otherwise threaten a firm's success or opportunities for improving a firm's situation. With respect to the economic situation, both the United States and foreign economies are presently facing some degree of economic uncertainty. In addition to dealing with the recent downturn in the dot-com/high- technology industry, the United States is also experiencing a general economic downturn that has resulted in nearly every single large corporation eliminating and/or otherwise reducing its workforce. Likewise, the United States is still recovering with the emotional and financial impacts and ramifications caused by the September 11, 2001 terrorist attacks.

The United States is not alone in experiencing economic uncertainty right now. Asia, Europe, and Latin America have all had financial difficulties of one form or another during the past few years. In addition, Asia, Europe, and Latin America have traditionally been (and still are to some degree) dependent upon the United States for at least a portion of their economic stability and support. However, with the United States reeling from the September 11, 2001 terrorist attacks, the dot-com downturn, the Enron scandal, sending military troops to Afghanistan, and other events, foreign countries are not exactly in an ideal position to expect and/or look to the United States to re-ignite their economies.

In addition to economic factors, current trends in cultural and social values may affect the industry, firm, or marketing strategy. Evidence indicates that coffee growers in developing countries (where Starbucks and most of their competitors purchase their coffee beans) generally receive only 30-50 cents per pound of coffee, while middle men pocket the rest of the $1-2 per pound paid by companies such as Starbucks. In addition to the economic disparity of this situation, such fact does not bode well for Starbucks and other gourmet and specialty coffee retailers who pride themselves on being socially conscious, socially responsible, and on taking care of their employees by adequately compensating them for their labor.

Current or pending federal, local, or state legislation may change or impact an industry, firm, or marketing strategy. In recent years, Starbucks and other gourmet and specialty coffee retailers have faced increasing pressure to begin and continue purchasing Fair Trade Certified coffee and marketing it in their retail outlets and on their internet sites. Under an agreement reached with a fair trade organization, Starbucks and other proprietors of gourmet and specialty coffees will buy Fair Trade coffee from certified importers who ensure that they have paid coffee farmers a fair and reasonable price for their coffee beans. In addition to ensuring that a greater portion of the money goes into the pocket of the individual coffee farmers, such an agreement will enable Starbucks and other gourmet and specialty coffee retailers to improve the quality of coffee and the quality of life for individuals residing in developing countries.

Lastly, threats or opportunities in the environment may influence an industry, firm, or marketing strategy. The main environmental threat which may affect the gourmet and specialty coffee industry, firm, or marketing strategy is the depletion of rain forests which occurs when coffee growers raze the rain forest in order to establish higher-yielding coffee bean plantations. Although depleting and destroying the rain forests in countries such as Cuba and Guatemala will enable coffee growers to reap the benefits of higher-yielding coffee bean plantations, this is a temporary effect, as the nutrients found in the soil of the rain forests are crucial to ensuring that the land remains fertile for growing crops. In addition, rainforests are vital breeding grounds for birds and other animals, animals that are essential to maintaining the ecological and environmental balance. Destroying the rain forests has and will continue to lead to these rare animals becoming depleted in numbers and eventually becoming extinct.

B. INDUSTRY

Factors relevant to conducting a thorough examination and evaluation of a particular industry include rivalry among existing competitors, threat of new entrants, and threat of substitute products. In addition, buyers and suppliers must be viewed as competitors since they may threaten the profitability of an industry or firm. Starbucks primary industry is gourmet or specialty coffee, i.e., cappuccinos, iced coffees, lattes, etc. However, in recent years, Starbucks has expanded its offerings to include a line of ice cream for supermarkets, a joint venture with Pepsi Cola to market is highly popular Frappuccino, and t-shirts, coffee mugs, etc. In addition, Starbucks continues developing and expanding its sales in alternative outlets such as foodservice and non-traditional retail sites such as Barnes & Noble and Chapters bookstores, Holland America cruise lines, Seattle Kingdome, and United Airlines.

In terms of competitors, Starbucks faces competition from numerous sources. First, Starbucks competes with franchise operators, local and regional coffeehouses, and specialty coffee retailers like Dietrich's Coffee, Coffee Bean, and Tea, Gloria Jean, Peet's, Seattle's Best, etc. Next, Starbucks faces competition from companies such as Kraft, Don Francisco's, Nestle, Proctor & Gamble, and others who sell their gourmet and specialty coffees at retail outlets like supermarkets. Although Starbucks has managed to establish and maintain its position as the nation's leading specialty coffee retailer and roaster, the fact is that the market for coffee is relatively saturated, particularly in the United States where a single block often contains 4-5 different coffeehouses. The relative strengths of Starbucks competitors are their environment (i.e., smaller coffeehouses generally feel more intimate and are less crowded) and their prices (i.e., smaller coffeehouses are generally lower priced than Starbucks). However, these strengths are also the greatest weaknesses of Starbucks competitors, for such companies often do not have the financial backing to enter into foreign or other new markets.

Given that the economy is somewhat unstable right now and the fact that the United States is rather saturated with coffeehouses, it does not appear that there is much of a threat of new competitors entering the industry. Even if new competitors decide to enter the market, they would face stiff (and most likely insurmountable) competition from Starbucks, Dietrich's Coffee (which has a joint marketing deal with Sports Chalet and other outlets), and also from large corporations such as Kraft, Nestle, and Proctor & Gamble who sell their products through supermarkets. In addition, competitors entering the gourmet and specialty coffee market would face economic barriers to entry since in order to become competitive and gain a significant market share, such companies would most likely have to offer their products at a price which is lower than Starbucks. Lastly, competitors entering the gourmet and specialty coffee market would have to decide whether the current economic situation (i.e., borderline recession) is and would be favorable to enter and survive in.

Soda is the main substitute product for coffee, offering the same (if not higher) level of caffeine and sugar that is found in a cup of coffee. The advantages that soda makers such as Coca-Cola and Pepsi have is that the market for their product is greater than the market for coffee. For instance, an individual may purchase Coca-Cola or Pepsi nearly everywhere, from fast food chains, gas stations, grocery stores, restaurants, sporting events, to vending machines. Due to the fact that gourmet and specialty coffee like the type offered by Starbucks is mainly intended to be served hot, its channels of distribution are somewhat more limited, though some vending machines do offer Frappuchinos (iced coffee). The main disadvantage of soda is that individuals who purchase soda often do not have the same experience as individuals who go to Starbucks, i.e., individuals who consume soda often purchase it and leave the premises whereas individuals who purchase Starbucks coffee often linger in the coffeehouse, interacting with co-workers, family, friends, or loved ones.

Tea is another main substitute product for coffee. Like soda, tea offers consumers an amount of caffeine and sugar that is comparable to what is found in coffee. In addition, tea has the historical or traditional notions of the Victorian era associated with it and consumers who are interested in having a traditional experience may desire to consume tea at a teahouse, something Starbucks and other gourmet and specialty coffee retailers cannot quite replicate. Likewise, tea is generally less costly than Starbucks and other gourmet and specialty coffees, though when purchased at a Victorian teahouse, the costs are generally comparable. The main disadvantage of tea is that unlike soda, not every individual finds tea appealing.

C. FIRM

In evaluating a selected company, it is essential to analyze the firm itself in relation to the industry as a whole and industry averages and also internally in terms of both cognitive and qualitative data. Key areas of concern include the firm's objectives, constraints, management philosophy, financial condition, and the organizational structure and culture. The firm's objectives and management philosophy of Starbucks is best illustrated by its mission statement, i.e., to "establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow." In furtherance of this end, Starbucks has created and applied for nearly 100 federal trademark registrations and also has several patent applications pending. Starbuck's patent in the United States for its coffee on tap system has positioned Starbucks as one of the dominant players in the coffee industry.

In measuring the appropriateness of its decisions, Starbucks relies on six guiding principles. First, Starbucks provides a great work environment and treats its consumers, employees, and vendors with dignity and respect. Next, Starbucks embraces diversity as an essential component in the way it does business. Third, Starbucks applies the highest standards of excellence to the purchasing, roasting, and fresh delivery of its coffee. Fourth, Starbucks aims to develop enthusiastically satisfied customers all of the time. Fifth, Starbucks contributes positively to its communities and its environment. Lastly, Starbucks recognizes that profitability is essential to its future success.

Starbucks has a plethora of financial and non-financial advantages working for it. First, there is the sheer market power that Starbucks has, i.e., its presence in a majority of states, Asia, and Canada. By opening new coffeehouses at a rapid and unparalleled pace, Starbucks has created numerous employment opportunities for tens of thousands of individuals. In addition, Starbucks has never experienced a strike or work stoppage, most likely due to the fact that Starbucks provides each and every single employee with health, dental, and medical benefits, a profit sharing and stock ownership program, and wages that exceed the minimum wage.

Likewise, Starbucks is one of the few large corporations that actually live up to its promise of being socially conscious and socially responsible, both on a local and international level. Starbucks has made and continues making significant contributions to local charities that focus on AIDS research and support, children, the environment, and the homeless. Likewise, Starbucks has agreed to purchase a percentage of its coffee from Fair Trade Certified coffee growers in an attempt to ensure that those individuals who are the primary source for Starbucks coffee beans are fairly and reasonably compensated.

In terms of constraints and weaknesses, there are very few obstacles which have stood or which presently impinge Starbucks' ability to accomplish its stated mission of becoming (and maintaining) the leading gourmet and specialty coffee retailer in North American and beyond. One constraint or weakness facing Starbucks is the law of supply and demand, a factor that all companies must anticipate and deal with. For example, there are only so many individuals in North America and beyond who consume gourmet and specialty coffee on a regular basis, and of this percentage, there are only so many individuals who are willing to pay upwards of $3-4+ for a single cup of coffee. As the economy tightens, individuals who may not have given a second thought to spending $3-4+ previously for a mocha latte may think twice in order to conserve their limited financial resources.

Another constraint or weakness that Starbucks has experienced and/or continues to experience is the fact that not ever individual feels comfortable with ordering goods or products via the internet. There have been numerous horror stories of individuals having their credit card number stolen while using the internet. In addition, not every individual, particular individuals who reside in countries outside of North America, is even connected to the internet. Thus, Starbucks may find that its market share of gourmet and specialty coffee orders placed online is limited. However, as the internet becomes more widely accepted as a viable means of transacting business, this situation will most likely improve.

In terms of actual and potential sources of dysfunctional conflict within the structure of Starbucks, it does not appear that such conflict exists. However, as is the case with all corporations, there is the potential that certain individuals within the corporation will have differing and perhaps conflicting viewpoints regarding how the company should expand, what markets the company should enter, how the company should market its products, what products the company should introduce, etc. In addition, there is also the potential for office politics to inhibit Starbucks from remaining focused on its core mission, i.e., selling the highest quality, freshest gourmet and specialty coffees. While these issues may cause temporary problems, Starbucks, like every other company, has been and will be able to resolve any existing tensions by ensuring that the lines of communication remain honest and open and by stressing the importance and value of teamwork.

The marketing department of Starbucks is organized in a peculiarly interesting manner. For numerous years, Starbucks has relied primarily on word of mouth as its best and most utilized form of advertising. In the past, Starbucks has done little national advertising, including a campaign for its Anniversary Blend of coffee in the New York Times. Additionally, Starbucks has occasionally run ads in papers such as the Los Angeles Times that offer consumers a discount on either a new product or one of their best-selling products such as the Frappuchino. Though several companies have built successful images through non-traditional marketing instead of advertising, Starbucks is among the biggest to buck the notion that you have to advertise in order to expand and maintain leadership in the marketplace.

D. MARKETING STRATEGY

Starbucks has developed an implemented a fairly comprehensive and successful marketing strategy. The primary objective of Starbucks marketing strategy is to sell only the finest whole bean coffees and coffee beverages. Additionally, Starbucks aims to establish and maintain itself as the most recognized and respected brand of coffee in the world. In pursuit of this marketing strategy, Starbucks purchases and roasts high-quality whole bean coffees and sells them, along with a variety of coffee beverages, pastries, confections, and coffee-related accessories and equipment. To ensure compliance with its rigorous standards Starbucks controls its coffee sourcing, roasting, and distribution through its retail stress, specialty sales group, and national mail order operation.

In furtherance of its marketing strategy, Starbucks has aligned itself with such prominent companies as Barnes & Noble, Chapters, Delta Shuttle, ITT Sheraton Hotels, Pepsi, and United Airlines in order to broaden its reach and to increase its profitability. The decision by Starbucks to align itself with airlines, bookstores, hotels, and other retail outlets outside of its own coffeehouses was extremely wise as it has enabled Starbucks to increase its visibility, nearly ensuring that wherever an individual may be at any given moment, he or she will be able to purchase Starbucks coffee. Likewise, Starbucks has managed to create and implement a marketing strategy that appeals to nearly every segment of the population, whether it be college students looking for caffeine while studying for midterms, senior citizens looking for a place to congregate and talk, teenagers seeking a place to socialize, or working individuals who need a cup of coffee to jumpstart their morning.

The marketing strategy utilized by Starbucks offers numerous competitive advantages. By aligning itself with airlines, bookstores, hotels, and other retail outlets beyond its own coffeehouses, Starbucks is able to reap the rewards of heavy foot traffic, i.e., customers who may not ordinarily visit a Starbucks may decide to try the product if it is easily accessible, i.e., in an area they had already planned to be in. Likewise, Starbucks product line has an expansive consistency, depth, and width. Although Starbucks originally began as a gourmet and specialty coffee retailer, it has broadened its reach to include Frappuchinos, iced coffees, juices, pastries, teas and a multitude of other products. In addition, Starbucks offers consumers the opportunity to purchase clothing, coffee mugs, specialty coffees, tea pots, and other products. It is the company's uncanny ability to recognize and adapt to the changing tastes of consumers and its unwavering willingness to experiment with products and marketing techniques that has allowed Starbucks to experience unparalleled growth and profitability.

II. PROBLEMS

When trying to determine what primary and secondary problems Starbucks has and/or will experience, it is quite difficult, perhaps because Starbucks has achieved and maintained such an unparalleled level of profitability and success. One of the main problems Starbucks faced and continues to face is how to expand its market share and profitability in light of ever-changing economic situations, both in the United States and in foreign countries. However, as is the case with other companies, there is no simple or proven answer for how Starbucks could and/or should deal with changing economic environments, as by their very definition, economic change is not an event that may be anticipated and/or dealt with in an efficient manner.

Another problem Starbucks has faced and will face in the future is expanding its reach into foreign countries. Expanding into foreign countries has been and may continue to be problematic for Starbucks for the same reason that Starbucks' expansion in the United States has been and continues to be; i.e., there are only so many individuals who drink coffee and the market is presently saturated with an abundance of local and regional coffee shops. However, one way for Starbucks to deal with this is to diversify its market reach by positioning itself in a plethora of settings like office buildings, downtown and suburban retail centers, and kiosks located in building lobbies, airport terminals, hotels, and supermarket foyers. Likewise, by selling its products over the internet and via mail order, Starbucks has ensured that individuals living anywhere may be able to purchase its coffee beans with a minimal expenditure of effort, money, and time.

Starbucks may also face problems due to economic circumstances and situations in the United States and foreign countries. An example of an economic situation that may present a problem for Starbucks is if the relationship between Starbucks and its coffee growers or vendors breaks down over business and/or personal issues. Likewise, if a coffee grower experiences difficult relations with its coffee farmers over issues such as compensation, the coffee farmers may decide to charge the coffee vendors a higher price, which will then most likely be passed on to Starbucks. In addition, if the economy begins to enter a recession (as is the case now arguably), consumers may decide to purchase fewer cups of coffee, which would impact Starbucks' profit margins and sales.

Another problem that Starbucks may experience is related to environmental situations like the depletion and destruction of rain forests by coffee farmers hoping to utilize higher-yielding coffee bean plantations. In addition, if a country where Starbucks purchases coffee beans experiences negative environmental situations like crop destruction on droughts, the price of coffee beans will likely rise due to the fact that the supply will be lessened. While negative environmental situations like droughts are generally temporarily, the rise in prices that will likely occur may hurt Starbucks' profitability or may force Starbucks to raise the prices it charges individuals, which may not be warmly received. Another problem Starbucks may face is pressure over genetically engineered ingredients and the use of growth hormones in milk. The issue of genetically engineered ingredients and products has only recently come to the forefront of public concern and the resolution is not apparent.