FOUNDATION OF BUSINESS STRATEGY

ON

STARBUCKS

Submitted by:

VIVEK PRAKASH MISHRA

FOOD & BEVERAGES INDUSTRY IN INDIA

INTRODUCTION

The Indian food industry is poised for huge growth, increasing its contribution in

world food trade every year. In India, food has become a high-profit industry by reason of the scope it offers for value addition, particularly with the food processing

industry getting recognised as a high-priority area in this liberalised era. Accounting for about 32 per cent of the country's total food market, the food

processing industry is one of the largest industries in India and is ranked fifth in terms of production, consumption, export and expected growth. The total food production in India is likely to double in the next 10 years with the country's

domestic food market estimated to reach US$ 258 billion by 2015. The role of the Indian government has been instrumental in the growth and

development of the industry. The government through the Ministry of Food Processing Industries (MoFPI) is making all efforts to encourage investments in the

sector. It has approved proposals for joint ventures (JVs), foreign collaboration, industrial licences and 100 per cent export oriented units.

Market size

The Indian food industry stood at US$ 135 billion in 2012 and is expected to grow

at a compound annual growth rate (CAGR) of 10 per cent to about US$ 200 billion by 2015, according to a report by KPMG. Indian agricultural and processed food exports during April-May 2014 stood at US$

3,813.63million, according to data released by the Agricultural and Processed Food Products Export Development Authority (APEDA). In 2013-14, the total

processed/value added agricultural products exported and the foreign exchange equivalent earned therefrom stood at Rs 4,627.99 crore (US$ 752.39 million) as

compared to Rs 3,689.26 crore (US$ 599.89 crore) during the previous year. The branded quick service restaurant (QSR) market in India, which has attracted

international brands such as McDonald's, Subway, Nando's, Domino's and KFC currently stands at US$ 13 billion and is set to get bigger with new emerging players.

Marine product exports from India touched US$ 5.01 billion during FY14, according to Ms Leena Nair, Chairperson, Marine Products Export Development Authority

(MPEDA).

Investment

The foreign direct investment (FDI) equity inflows in food processing industries during April 2000-July 2014 stood at US$ 5,949.21 million, as per data released by

Department of Industrial Policy and Promotion (DIPP). The following are some of the investments and developments in the sector:

ITC Ltd plans to foray into new categories such as beverages that include fruit juices, tea and coffee, and chocolates and dairy products. As a part of its plan

to enter the dairy sector, the company is constructing a milk processing unit at Munger in Bihar.

Bisleri International Pvt Ltd has launched its first branded soda in Hyderabad. "This is our first experiment in the country. We will scale it up to other states

in the days to come," said Mr Santosh AS Borkar, Director - South Zone, Bisleri International Pvt Ltd. The company would also be setting up eight

water plants in Telangana and Andhra Pradesh. Nissin, owner of Top Ramen Noodles, has launched a differentiated noodle -

Scoopies Mad Masala Short Noodle. The company commissioned its third

factory in Odisha earlier this year, with an investment of Rs 100 crore (US$ 16.25 million), from where the product would be manufactured.

Food Bazaar plans to tap the under-branded food and beverages space in the Indian domestic market with the help of private labels to offer more choice to

the consumers. Hindustan Coca-Cola Beverages, the Coca-Cola Company's largest bottling

partner in India, plans to set up a Rs 1,000 crore (US$ 162.48 million) bottling plant in Telangana and has also sought land for the proposed venture.

Café Coffee Day (CCD), in a bid to expand its market in India, plans to add 150 cafes and 120 more Xpress outlets across the country during FY15.

STARBUCKS

Starbucks Corporation, generally known as Starbucks Coffee, is an American

global coffee company and coffeehouse chain based in Seattle, Washington.

Starbucks is the largest coffee house company in the world ahead of UK rival Costa

Coffee, with 20,737 stores in 63 countries and territories, including 11,910 in

the United States, 1,496 in China, 1,442 in Canada, 1,052 in Japan and 772 in

the United Kingdom.

Starbucks locations serve hot and cold beverages, whole-bean coffee, micro ground

instant coffee, full-leaf teas, pastries, and snacks. Most stores also sell pre-packaged

food items, hot and cold sandwiches, and items such as mugs and tumblers.

Starbucks Evenings locations also offer a variety of beers, wines, and appetizers after

4pm.[6] Through the Starbucks Entertainment division and Hear Music brand, the

company also markets books, music, and film. Many of the company's products are

seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee

are also offered at grocery stores.

From Starbucks' founding in 1971 as a Seattle coffee bean roaster and retailer, the

company has expanded rapidly. Since 1987, Starbucks has opened on average two

new stores every day. Starbucks had been profitable as a local company in Seattle in

the early 1980s . but lost money on its late 1980s expansion into the Midwest

and British Columbia. Its fortunes did not reverse until the fiscal year of 1989-

1990, when it registered a small profit of $812,000. By the time it expanded

into California in 1991 it had become trendy. The first store outside the United States

or Canada opened in Tokyo in 1996, and overseas stores now constitute almost one

third of Starbucks' stores.[11] The company planned to open a net of 900 new stores

outside of the United States in 2009, but has announced 300 store closures in the

United States since 2008.

Starbucks PESTEL Analysis

PESTEL stands for political, economic, social, technological, environmental and

legal factors affecting the business and it is widely considered to be one of the most

effective analytical tools used to analyse the impacts of external factors to the

company. The following table represents PESTEL analysis conducted forStarbucks

Coffee Company:

Political

Industry-specific rules and regulations

The level of relationships between USA and countries that produce coffee beans

The level of political stability within a country.

Economic

Buying power of consumers

Local currency exchange rates

Local economic environment within each market Starbucks operates

Taxation level

Social

Changing family patterns in USA and Europe

Consumer preferences

Changing work patterns

Changes in lifestyles of population

The level of education of population in local markets

Changing values among population

Technological

Emergence of innovative technology

Biotechnological developments

Developments in agriculture

Environmental

Environmental rules and regulations

Environmental disasters in countries producing coffee beans

Global warming and other environmental issues in a global level

Legal

Introduction of policies and regulations by health authorities about caffeine production and consumption

Introduction of tougher customs and trade regulations

Licensing regulations related to the industry.

Starbucks Porter’s Five Forces Analysis

Porter’s Five Forces represents theoretical framework that is used for industry

analysis and strategy development. Specifically, the five forces shaping

competition within the industry consist of the intensity of rivalry among the

competitors, the risk of entry of new competitors, the bargaining power of buyers,

bargaining power of suppliers and the threat of substitute products and services.

The nature of the relationships among these forces is best presented in the

following figure.

Starbucks Coffee Company is a global coffee company and a coffeehouse chain

headquartered in Washington, the US and the company has generated a

consolidated revenues of $14.9 billion during 2013 with more than 200,000

partners, referred to as employees .

Rivalry among existing competitors is high within the industry Starbucks operates

in with major competitors like Costa, McDonald’s, Caribou Coffee, and Dunkin

Donuts and thousands of small local coffee shops and cafes.

Starbucks customers possess large amount of bargaining power because there is

no and minimal switching cost for customers, and there is an abundance of offers

available for them.

The threat of substitute products and services for Starbucks is substantial.

Specifically, substitutes for Starbucks Coffee include tea, juices, soft drinks, water

and energy drinks, whereas pubs and bars can be highlighted as substitute places

for customers to meet someone and spend their times outside of home and work

environments.

Starbucks suppliers have high bargaining power due to the fact that the demand

for coffee is high in global level and coffee beans can be produced only in certain

geographical areas. Moreover, the issues associated with African coffee producers

being treated unfairly by multinational companies are being resolved with the

efforts of various non-government organisations, and this is contributing to the

increasing bargaining power of suppliers.

However, the threat of new entrants to the industry to compete with Starbucks

is low, because the market is highly saturated and substantial amount of financial

resources associated with buildings and properties are required in order to enter

into the industry.

Starbucks Value-Chain Analysis 2014

Value-chain analysis is an analytical framework that is used to analyse relationships

between various parts of operations and the manner in which each part adds value to

contribute to the level of revenues. Company value-chain can be divided into two

groups: primary and support activities.

Business’s inbound logistics, operations, marketing and sales, outbound logistics,

and service are considered as primary activities in value-chain as they are involved

in value creation in a direct manner. Support activities in value creation, on the other

hand, include infrastructure, human resources management, and procurement.

The following figure represents Starbucks Value-Chain analysis for the UK market:

The value of value-chain analysis in practical level can be explained in a way that

it allow to critically analyse each component of a business practice in an individual

manner, and search additional sources for competitive advantage within the

component.

Starbucks Strategic Fit Analysis

The following table revisits opportunities and threats faced by Starbucks in the UK

market and briefly analyses the extent of fit between these and Starbucks strengths

and weaknesses:

Fit Comments

Opportunities

New product development

Yes With the record revenues of $11.7 generated in 2011, Starbuck possesses sufficient amount of financial resources in order to engage in new product development in a successful manner

Increasing the level of operational efficiency through technological innovation

Yes Starbucks possesses financial and human resources to engage in research and development in order to increase the level of operational efficiency through technological innovation

Increasing the range of target customer segment

Yes Necessary amount of expertise and resources are possessed by Starbucks so that the range of target customer segment can be increased

Specifically, a range of lower priced drinks and food need to be added to Starbucks menu so that individuals with lower budgets can also be included to target customer segment

Further damage to brand image due to paying no taxes scandal

Yes Effective PR programs can be initiated by Starbucks so that the negative impact of the scandal can be minimised

Threats

Adverse impact of changes in the UK taxation policy

No Starbucks possesses no tools to impact changes in UK taxation policies

Continuing economic issues in the EU and the UK negatively impacting the levels of consumer spending

No Starbucks management can not address macroeconomic issues in the UK with negative implications on the levels of consumer spending

The level of strategic fit for Starbucks

Starbucks McKinsey 7S’ Framework

The rationalised plan for effective leadership and management for Starbucks

Corporation is best presented through McKinsey 7S’ Framework. It has to be noted

that “the essence of McKinsey’s 7S model is that a firm is the comprehensive sum

of its parts, and that the internal dynamics of an organization clearly determine that

organisation’s ability to compete, the premise being that both the strategy and the

structure of the organisation determine management’s effectiveness” (Joseph and

Mohapatra, 2009, p.59).

The 7S’es of the framework are divided into hard and soft elements. Strategy,

structure and systems are considered to be hard elements of the framework,

whereas, soft elements consist of shared values, skills, style and staff. Starbucks

management have direct influence and control over the hard elements of the

framework, whereas the soft elements are usually influenced by corporate culture,

and therefore they are more difficult to control.

Hard Elements

Strategy. Starbucks has to be concentrating on the quality of its products at the

same time offering excellent level of customer services. The main strategy for the

company is to increase revenues through effectively positioning Starbucks stores

as ‘third place’ environment.

Structure. Flat management structure needs to be achieved through de-layering.

Specifically, the positions of assistant managers need to be eliminated within the

stores, after which there will be only three levels of management – store manager,

shift manager and customer assistants, thus considerable amount of costs can be

saved and organisational efficiency can be increased.

Systems. Rather than daily roles among customer assistant being appointed by shift

supervisors, the rotation system of duties needs to be introduced that will reduce

the potential of conflicts among the workforce, and the work process would be

more interesting.

Soft Elements

Shared values. Currently effective set of values are being promoted by

management at Starbucks, however, more effective initiatives and programs need

to be devised that would ensure these values being shared and appreciated by all

members of the workforce.

Skills. Necessary training and development programs need to be organised in a

systematic manner and thus it has to be ensured that all members of the workforce

are equipped with skills necessary to achieve a high level of customer satisfaction.

Style. Management style within stores should be changed from Laissez Faire to

inspirational management. In this way a greater number of the workforce can be

effectively motivated for higher performances with less financial resources.

Staff. Only capable and promising candidates need to be employed by Starbucks

and employees have to be provided growth potential.

Starbucks Strategic Capabilities

Threshold resources for Starbucks operations in the UK consist of venues, basic

coffee machine, tables, cups, human resources etc. However, threshold resources

would not suffice in terms of enabling Starbucks to survive the competition, and

therefore, Starbucks utilises a set of distinctive resources in UK market that include

effective design of shops, a wide range of fresh coffee and other products, customer

loyalty card, as well as, sophisticated Verismo technology.

Likewise, threshold competencies for Starbucks may consist of selling coffee drinks

and food prepared through basic processes to customers in the most basic manner.

Nevertheless, Starbucks strives to achieve a competitive advantage in the market

through a set of core competencies that include exceptional customer services

achieved through a high level of employee motivation, focus on product quality, and

strong leadership from CEO and President Howard Schultz.

Starbucks also possesses the following competencies and capabilities:

Generating a record total revenues of USD 13.3 billion to further contribute to its

strong financial position

Entering the market of super-premium juices through acquiring Evolution Fresh

Increasing the range of its products through the introduction of Starbucks Blond

Roast

Initiating a set of corporate social responsibility programs and partnerships such as

strategic partnership with DonorsChoose.org, initiating Youth Action Grants, etc.

Launching personalised Frappuccino drinks