CASE STUDY: STARBUCKS

Introduction
In 1971, the original Starbucks opened in Pike Place Market in Seattle,
Washington by three partners named Jerry Baldwin, Zev Siegal, and
Gordon Bowker.  Their focus was to sell coffee beans and equipment. 
They purchased green coffee beans from Peet’s, a specialty coffee roaster
and retailer, during their first year of operation.  Later, they began buying
coffee beans directly from the growers.  In 1983, an entrepreneur by the
name of Howard Schultz joined the company; Schultz felt that the
company should sell coffee and espresso drinks as well as coffee beans. 
The partners felt that selling coffee and espresso drinks would take away
from their primary focus of selling coffee beans.  Since the idea did not
work, Schultz started his own company called II Giornale coffee bar chain
in 1985.    In 1987, the original owners of Starbucks sold their chain to
Schultz’s II Giornale.  Schultz changed II Giornale outlets to Starbucks
chains and quickly began to expand.

Starbucks coffee has grown into the largest coffeehouse company in the
world with 16,120 stores in 94 countries such as in Australia, Canada,
China, Puerto Rico, etc.  Starbucks has thirty blends and single origin
coffee.  Starbucks brand coffee can also be purchased in local stores to
brew at home.  Starbucks employs over 140,000 employees worldwide
with over five million customers a week.  At one point they had typical
customers coming in on an average of six times a month while loyal
customers come in on an average of eighteen times a month spending
averaging $50.

Overview
Starbucks understands concepts of brand identity and product
differentiation. They have tapped in on what the consumer perceives and
had managed to differentiate themselves between other companies’
products or services. They realize this success depends significantly on
the value of the Starbucks brand while relying on its excellent reputation
for their product quality, consistent customer service. They position
themself as a specialty premium coffee retailer and has a strong and well-
known brand image.
As it is a premium coffee brand, its target market has always been middle
and upper class with the disposable income needed to frequent the
coffeehouse. One of the main reasons Starbucks has been so successful is
because they focus on quality and experience rather than price. The
Starbucks’ image and experience has been one of the key elements to
their success. Starbucks has succeeded in giving coffee a new cachet and
established themselves as a price setter through product differentiation.
Consumers have been willing to pay for what they consider an elite
lifestyle and many believe that the higher the price, the better the
quality.
The management believes it must safeguard and develop the value and
importance of the Starbucks brand in order to bring continued success in
the future. Starbucks has been able to establish an ambiance of
sophistication and intellect. Loyal customers enter the retail chain as an
escape from their mundane lives into a serene, regal atmosphere where
they proudly sip from their branded mugs. Starbucks profits from the
way they make their customers feel, allowing them to portray a
prominent image and feel like the upper crusted elite in society.
Therefore, Starbucks brand equity and quality is synonymous with high
prices and a classy image.
The Company already owns and has also applied to register many service
marks and trademarks both in the United States and in many countries
around the world. Starbucks owns numerous copyrights for items such as
product packaging, promotional materials, in-store graphics, and training
materials. In addition, the company also holds patents on certain
products, systems, and designs and has registered and maintains
numerous Internet domain names, including “Starbucks.com” and
“Starbucks.net”.
Challenges
EXTERNAL: One of the external challenges was increasing competition.
The main competitors are quick-service restaurants and specialty coffee
shops. There are an abundant number of competitors in the specialty
coffee beverage industry. For instance, in 2006, Dunkin Donut brought
into the market coffeehouse aesthetic and increased its presence in the
U.S. Also, there was competition from McDonald’s, an established food
chain.
The other external challenge was related to the economic situation in the
U.S. during the period between 2007 and 2009. There was a sagging
economy experienced in the U.S. in 2008. For instance, there were
increases in the price of gas and milk which consequently affected the
operational costs of the business. Economic factors have a direct effect
on the operations of the business. The economy was sagging. This
affected the cost of operations and the ability of the company to sustain
its employees. For instance, London’s Sun newspaper alleged that the
sanitizing process wasted “millions of litres of precious drinking water”.
This portrayed the company as being environmentally irresponsible.
INTERNAL: There were internal challenges including complacency of
employees, the original Starbucks’ company values were no longer
cherished by the staff. For instance, Schultz pointed out that the
managers were disinterested with the work and only concerned with the
gross margins instead of the organizational values. Also, the barristers did
not have a traditional connection with customers. Some stores were
running out of stock. During the time of change, there is the need to
abandon some organizational practices to ensure that a change is
implemented in the organization. However, some forces may derail the
change.
In the case of Starbucks, both internal and external forces presented the
challenge to the change process. It is worth noting that if there is an
equilibrium between the forces, then change cannot be realized.
Therefore, there must be an imbalance in which the driving forces
overcome the restraining forces. In Starbucks, the driving changes
included the strong need to restore the values of the company, improve
the value to stakeholders and restore profitability, a team prepared for
change, supporting shareholders, and loyal customers. On the other
hand, the restraining forces were cynicism by the media and some
stakeholders, sagging economy and rituals.

Approach
To overcome the challenges, the CEO did put in place strategies to restore
the stakeholder value. For example, about competition, the CEO
proposed to put in place strategies that focused on long term goals
instead of the short-term expectations of the stakeholders. Also, the CEO
engaged shareholders throughout the change process. For instance, there
were meetings held to brief the shareholders on the change process that
was planned. It is worth noting that high levels of performance can be
enhanced by a clear understanding of the competitive position of a
company.
The types of food choices, pricing and restaurant ambiance create the
diversity among competitors. Customers may choose among competitors
based on preference. Pricing varies among competitors as well.
Starbucks pricing is considered to be higher than average. The ambiance
among the competitors varies from a fast-food chain where the objective
is to get fast service, while the coffeehouses ambiance is slow-paced and
relaxed.
Although premium brand coffee makers have some market power to set
prices above the generic value brands, Starbucks operates under
monopolistic completion where there are many small firms that sell
similar products, therefore they do not exert complete market power in
the industry. Pricing decisions also serve as a marketing tool and is one of
the most compelling attributes of product positioning. It makes a very
clear statement about how a consumer should perceive a product.
Starbucks cannot become the low-price leader; it takes away from the
brand image and ambience that they are known for.

Solution
To overcome the challenges, the CEO employed a leadership style that
promoted shared values. The leadership style entailed communicating his
story and value proposition to the shareholders and leaders. Another
move was to reduce the pace of rapid store opening. The CEO went
against the established company’s culture and closed down some stores.
In the process, there was also a strategy of innovation and bringing
onboard new products that enhanced Starbuck’s experience. An example
was the VIA instant coffee. Other measures entailed restructuring the
supply chain and the overall organizational structure.
In the process of implementing the change, issues arose such as lack of
good presence in social media and hence the company capitalized on that
and created platforms where it could respond to customers’ concerns.
Other issues during the change process were the economic difficulties
that were taking place in the U.S. The company had to lay off employees
to remain competitive.
When Starbucks became a major competitor, it was because the
company’s environment was like none other and focuses on the benefit
of the customer. People considered Starbucks as a “third place” after
home and work. Howard Schultz’s vision was not to build a coffee shop,
but instead build a company that treats people with dignity and respect.
He wanted to establish a place where you can go relax and have a
delicious coffee and smother yourself in a comfortable seat that makes
you feel like you’re sitting on your living room couch. Ear pleasuring
music will be consuming your background and make a customer feel as if
they are at their home away from home. Or a place where you can bring
your laptop and get some work done if there were any distractions at
home or work. Starbucks is also the type of place where you can meet a
friend, stay and talk for hours, and feel like you’re the only two people in
the place.
Results
Organizational change plays a critical role in the strategic positioning of a
company. The case of Starbucks has shown the importance of an inclusive
leadership style where the key stakeholders are involved in the
leadership process. It has exemplified the need for designing a change
process and putting in place measures to lobby for internal support to
ensure an effective change process. Also, the case has shown the
importance of communication during the change process.
Starbucks has been forced with the changing times and the economy to
drive down their prices to compete in the industry. The closing of stores
and the reduction of staff proves that their pricing model only projected a
short-term profit, as in the case of any firm operating in a monopolistic
competition. Whatever forecasting models Starbucks has projected does
not hold true as the income effect and added popularity of their
competitors began monopolizing the premium coffee market. This
proves that the price of coffee is elastic and if prices are high than the
demand for the good will decrease.
Starbucks has had much market power in the gourmet coffee industry.
They have attracted customers by an experience of an upscale French
coffee shop with a neighbourhood feel. In the current economic state,
their prices have caught up to them causing their demand to decrease.
People do not want to spend their limited income on premium coffees
that they can get from any of their competitors, like Dunkin’ Donuts,
McDonalds and Panera Bread.
Many outside factors also contribute to Starbucks losing its brand appeal.
People have begun to realize that they have alternatives to purchasing
Starbucks coffee and still sample the luxurious blend by brewing it at
home themselves. Customers no longer follow the hype supported by the
Starbucks name and are becoming more price/value oriented. To remain
a major player in the coffee shop market, Starbucks must reinvent
themselves with the changing lifestyles, tastes and react to the
alternatives within the market.