Starbucks Situational Analysis: Strategy and Market Challenges

Environmental Analysis

Important environmental factors relating to a firm include economic conditions, cultural and social values, current trends, political and legal factors, and environmental threats or opportunities. These elements may impact or otherwise threaten a firm's success, or may present opportunities for improving a firm's situation. With respect to the economic situation, both the United States and foreign economies were facing a degree of economic uncertainty at the time of this analysis. In addition to dealing with the downturn in the dot-com and high-technology industry, the United States was experiencing a general economic slowdown that resulted in nearly every large corporation reducing or eliminating its workforce. The United States was also still recovering from the emotional and financial ramifications of the September 11, 2001 terrorist attacks.

The United States was not alone in experiencing economic uncertainty. Asia, Europe, and Latin America had all faced financial difficulties of various forms during the preceding years. Moreover, these regions had traditionally depended, at least in part, on the United States for economic stability and support. With the United States contending with the aftermath of the September 11 attacks, the dot-com downturn, the Enron scandal, and military operations in Afghanistan, foreign countries were not well positioned to look to the United States to reinvigorate their economies.

Current trends in cultural and social values also affect the industry and its marketing strategy. Evidence indicates that coffee growers in developing countries — where Starbucks and most of its competitors purchase their coffee beans — generally receive only 30 to 50 cents per pound of coffee, while middlemen retain the remainder of the $1 to $2 per pound paid by companies such as Starbucks. This economic disparity does not align well with Starbucks' public commitment to being socially conscious and socially responsible, and to fairly compensating those who provide its raw materials.

Legislation — current or pending at the federal, state, or local level — may also change or affect an industry or firm. In recent years, Starbucks and other specialty coffee retailers faced increasing pressure to purchase Fair Trade Certified coffee and to market it in their retail outlets and on their websites. Under an agreement reached with a fair trade organization, Starbucks and other specialty coffee retailers agreed to buy Fair Trade coffee from certified importers who ensure that farmers receive a fair and reasonable price for their beans. This arrangement not only directs a greater share of revenue to individual coffee farmers but also enables Starbucks to improve coffee quality and support the quality of life in developing countries.

Finally, environmental threats or opportunities may influence an industry or firm's strategic direction. A significant environmental threat facing the gourmet and specialty coffee industry is the depletion of rainforests, which occurs when coffee growers raze forested land to establish higher-yielding plantations. Although this practice may boost short-term yields in countries such as Guatemala, it is ultimately counterproductive: the nutrients in rainforest soil are essential to long-term agricultural fertility. Furthermore, rainforests serve as vital breeding grounds for birds and other animals that are critical to maintaining ecological balance. Continued destruction of these habitats leads to population decline and, ultimately, the extinction of rare species.

Industry Analysis

A thorough examination of an industry requires analysis of rivalry among existing competitors, the threat of new entrants, and the threat of substitute products. Buyers and suppliers must also be considered potential competitive threats, since they may affect the profitability of a firm or industry. Starbucks' primary industry is gourmet and specialty coffee — cappuccinos, iced coffees, lattes, and similar beverages. In recent years, however, Starbucks expanded its offerings to include a line of ice cream for supermarkets, a joint venture with Pepsi-Cola to market its highly popular Frappuccino, and branded merchandise such as t-shirts and coffee mugs. Starbucks also continued developing sales through alternative outlets, including Barnes & Noble and Chapters bookstores, Holland America cruise lines, the Seattle Kingdome, and United Airlines.

Starbucks faces competition from numerous sources. It competes directly with franchise operators, local and regional coffeehouses, and specialty coffee retailers such as Dietrich's Coffee, Coffee Bean and Tea, Gloria Jean, Peet's, and Seattle's Best. It also faces competition from large consumer packaged goods companies — including Kraft, Don Francisco's, Nestlé, and Procter & Gamble — that sell gourmet and specialty coffees through supermarkets. Although Starbucks has established and maintained its position as the nation's leading specialty coffee retailer and roaster, the domestic coffee market is relatively saturated; a single city block frequently contains four or five different coffeehouses. Smaller competitors hold advantages in atmosphere — their stores tend to feel more intimate and less crowded — and in pricing. However, these same competitors are often unable to secure the financial backing required to enter foreign or other new markets, which remains a fundamental weakness.

Given the economic instability of the period and the saturation of the domestic coffeehouse market, the threat of significant new entrants appears limited. Any new competitor would face formidable opposition from Starbucks, from established specialty retailers such as Dietrich's (which has a joint marketing arrangement with Sports Chalet), and from large corporations selling through supermarket channels. New entrants would also confront economic barriers to entry: gaining meaningful market share would likely require pricing below Starbucks, an unsustainable position in an already competitive landscape. Additionally, prospective entrants would need to weigh whether a borderline recessionary economic environment is conducive to launching and sustaining a new venture.

Soda is the primary substitute product for coffee, delivering comparable or higher levels of caffeine and sugar. Products from Coca-Cola and Pepsi are available through a far wider range of distribution channels — fast food chains, gas stations, grocery stores, restaurants, sporting venues, and vending machines — than specialty coffee. However, the coffeehouse experience that Starbucks provides is a meaningful differentiator: customers who purchase soda typically do so and leave, whereas Starbucks patrons often linger, socializing with coworkers, family, or friends.

Tea is another significant substitute. Like soda, tea offers consumers a comparable caffeine experience, and it carries cultural associations — particularly with Victorian-era traditions — that appeal to certain consumers. Tea is also generally less expensive than Starbucks beverages, though when consumed at a Victorian teahouse, prices are often comparable. The primary limitation of tea as a substitute is that it does not appeal to all consumers in the way that coffee does.

Firm Analysis

In evaluating a company, it is essential to analyze the firm relative to industry averages and to examine it internally in terms of both quantitative and qualitative data. Key areas include the firm's objectives, constraints, management philosophy, financial condition, and organizational structure and culture. Starbucks' objectives and management philosophy are best captured in its mission statement: to "establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow." In pursuit of this mission, Starbucks applied for nearly 100 federal trademark registrations and had several patent applications pending, including a U.S. patent for its coffee-on-tap system, which positioned the company as one of the dominant players in the industry.

Starbucks measures the appropriateness of its decisions against six guiding principles: (1) providing a great work environment and treating consumers, employees, and vendors with dignity and respect; (2) embracing diversity as an essential component of doing business; (3) applying the highest standards of excellence to the purchasing, roasting, and delivery of its coffee; (4) developing enthusiastically satisfied customers; (5) contributing positively to its communities and environment; and (6) recognizing that profitability is essential to its future success.

Starbucks benefits from a broad array of financial and non-financial strengths. Its market presence spans a majority of U.S. states, Canada, and parts of Asia. By opening new locations at a rapid pace, Starbucks created employment opportunities for tens of thousands of individuals. The company had not experienced a single strike or work stoppage at the time of this analysis, a record most likely attributable to its comprehensive employee benefits package — which includes health, dental, and medical coverage; a profit-sharing and stock ownership program; and wages exceeding the minimum wage.

Starbucks is also one of the few large corporations that consistently fulfills its commitment to social responsibility, both locally and internationally. The company makes ongoing contributions to charities focused on AIDS research and support, children's causes, the environment, and homelessness. It has also committed to purchasing a portion of its coffee from Fair Trade Certified growers, helping to ensure that the farmers who supply its beans are fairly compensated.

In terms of constraints and weaknesses, few obstacles materially impinge on Starbucks' ability to accomplish its mission. One structural constraint is the law of supply and demand: there is a finite population of individuals in North America and beyond who consume specialty coffee regularly, and within that group, a further subset willing to pay $3 to $4 or more for a single beverage. As economic conditions tighten, consumers who previously spent freely on a mocha latte may reconsider in order to conserve financial resources.

A second constraint involves e-commerce. Not every consumer is comfortable making purchases online, partly because of concerns about credit card security. Furthermore, not every potential customer — particularly those outside North America — is connected to the internet. As a result, Starbucks' online market share for coffee orders was limited at the time, though the expectation was that broader internet adoption would gradually improve this situation.

In terms of internal organizational conflict, no significant dysfunctional conflict was apparent within Starbucks' structure. As with any corporation, however, there is always the potential for differing viewpoints on strategy — regarding which markets to enter, which products to introduce, and how to market the company's offerings. Office politics also carry the potential to distract the organization from its core mission. Starbucks, like other successful companies, was expected to manage these tensions by maintaining honest, open communication and reinforcing the value of teamwork.

The marketing organization at Starbucks is structured in a notably distinctive way. For many years, the company relied primarily on word-of-mouth as its principal form of advertising, doing very little national advertising — notable exceptions included a campaign for its Anniversary Blend in The New York Times and occasional promotional ads in the Los Angeles Times. Starbucks stands among the largest companies to have expanded and maintained market leadership without relying heavily on traditional advertising.

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