External and Internal Analysis of Starbucks Case Study

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Abstract

Starbucks was started in 1971 and since then, the company has expanded very fast. It now has over 15,000 stores in over 44 countries. Starbucks seeks to sell experience, and not just coffee.

The company had previously relied on word of mouth and a strong global brand as part of its marketing efforts. However, with competition getting stiffer by the day, Starbucks has had to employ various promotional strategies such as the use of loyalty cards.

Although Starbucks was very successful in the United States, this success was not replicated in the Australian market. This is because by the time the company ventured into the Australian market, smaller boutique-style coffee shops in the country had already gained popularity with coffee drinkers since they offered personalized and services.

In addition, the discerning nature of the Australians, along with the fact that they had already developed sophisticated palates meant that Starbucks did not appeal to the locals as the management had anticipated.

Some of the lessons that other aspiring companies who want to venture into the international market can borrow from the failure of Starbucks in Australia is that it is important to study, adopt and embrace the cultural differences in a given country.

The report further recommends that Starbucks should consider forming partnerships with local companies in the coffee industry. In addition, the company should consider diversifying to other food products besides coffee in a bid to cushion its revenue collection during harsh economic conditions.

Report Purpose

The purpose of the report is to examine the external and internal analysis of Starbucks. In addition, the report shall also explore Starbuck’s failure in Australia, and the reasons behind this failure. Also, the report shall endeavour to provide recommendations for the case study in view of the marketing issues raised.

Brief overview of the company

The history of Starbucks dates as far back as 1971 when Starbucks opened its first coffee store in Seattle’s Pike Place market (Patterson et al. 2010). In 1992, Starbucks became a publicly-listed company. By this time, the company already had 140 stores in operation. By 2008, Starbucks was opening 8 stores per day.

At the moment, Starbucks is ranked as the leading global coffee chain operator. It has operations in 44 countries, with over 15, 000 stores in operation (Patterson et al., 2010). Starbucks has also been successful because it has managed to create an atmosphere that enables customers to relax away from home.

Organisations make use of marketing communication as a strategy to differentiate, position, as well as tangibilise the service. In this case, brand is vital to convey the company’s image. The branding symbols should be easily recognised. In addition, the brand image should also have appealing attributes.

In the case of Starbucks, the company’s logo still retains the mar maid image that was adopted upon its inception in 1971. However, the management recently modified the logo in which the words ‘Starbucks Coffee’ were removed. This is a positioning strategy that will allow the company to trade in other products besides coffee, including music, alcohol, and ice cream.

Starbucks External Analysis

Political/ Legal environment

Starbucks imports coffee beans from different countries and each of these countries has its own tariff and customs regulations. In addition, any political upheavals in the countries where Starbucks imports its coffee beans would greatly interfere with the company’s operations.

Starbucks is expected to file for all important permits and forms, before it can be authorized to conduct business in a foreign country (Buckstein, 2010). The business operations of Starbucks will also be affected by local and federal laws and regulations.

Economic environment

The global financial crisis of 2008 greatly affected the operations of Starbucks in various countries. The recession resulted in an increase in the operational costs of the company (Bureau of Labor Statistics, 2011).

The coffee industry is demand- driven and when economic conditions are harsh, consumers treat coffee as a luxury and this affects sales (World Bank, 2010). Exchange rate and taxation shall also affect the operations of Starbucks through currency conversion.

Socio-cultural environment

Consumers across the world are increasingly demanding fair practices, and this has seen many firms change their operating practices in order to accommodate these demands (Northey, 2007), and Starbucks is no exception.

The company implemented the C.A.F.E program with a view to addressing issues raised by customers regarding Starbucks’ social reasonability (ICO, 2011). The company has also had to adjust its product offerings in order to meet the growing demands of the rising number of educated and health conscious consumers.

For example, Starbucks now non-fat milk coffee (Wall Street Journal, 2009). Consumers are also increasingly becoming aware of the need to reduce their sugar intake and Starbucks has also had to adjust the sugar content of its coffee products as well (Wall Street Journal, 2009).

Technological Segment

Advances in technology affect product innovation, product services, customers’ store experience, and the way organizations are able to interact with other business partners. Technological improvements can enable a company to market its products directly to their target market using emails, text messages, and social network sites as well (Moreno, 2008).

Through the use of technology, Starbucks has managed to change its product mix to suit new market segments. A good example is the company’s VIA ready brew (Starbucks, 2011) and internet surfing srevices using Wi-Fi internet connectivity (Oliviera, 2011).

Starbucks External Environment Analysis: Competitors

The two main competitors of Starbucks are MacDonald’s McCafe and Dunkin Donuts. On the one hand, McCafe maintains a low price strategy o its products (Burritt, 2007). On the other hand, Dunkin Donuts offers customers a variety of coffee flavors to choose from, in addition to its emphasis on quality (Dicarlo, 2004).

Starbucks External Environment: Customers

Starbucks provides interpersonal services to its customers in whereby there is high contact between baristas, staff, and customers (Miller, 2010).. The company has tried to change the formula of some of its products to suit the tastes and preferences of customers in certain markets (Patterson, Scott & Uncles 2010, p. 44).

The contact personnel at Starbucks play a very vital role in enhancing relationships with customers. In this case, these contact persons act as the company’s brand champions. The management at Starbucks recognizes the important role played by the staff and Baristas, which is why they offer rewards and incentives in recognition of their exemplary work.

Internal Analysis of Starbucks

Starbucks Internal Analysis: Products

Starbucks boasts of a wide variety of over 30 coffee products that customers can choose from. The company is always introducing novel products in the market to suit the changing demands, tastes and preferences of its growing customer base. Some of the notable new products include “Instant via Ready” and “Tazo Tea Infusions” (Patterson et al., 2010, p. 44).

Internal Analysis of Starbucks: Price

Starbucks’ products are priced at a premium owing to the perceived upscale image in the eyes of the consumers. In this case, Starbucks uses high pricing to differentiate itself from the rest of the competition (Starbucks, 2011).

Starbucks Internal Analysis: Place

Most Starbucks coffee stores are located in neighborhoods with high traffic. The company’s coffee stores are also located in different large chains. The “third place” concept as practiced by Starbucks has helped to turn its stores into an ideal environment away from home where customers can relax, surf the internet, or listen to music (Patterson et al., 2010, p. 45).

Internal Analysis of Starbucks: Promotion

One of the fundamental requirements for successful promotion is to facilitate friendly and smooth interactions among the company’s representatives and the market without compromising the efficiency manner in which a company is able to offer its services to the target market.

Until very recently, Starbucks has relied on word of mouth and its large store presence as its advertising and promotional and advertising tools (Patterson et al., 2010, p. 45). The management was convinced that a memorable and distinct brand would result in customer loyalty and repeat business. However, as competition becomes stiffer, Starbucks has had to embrace various promotional strategies.

The success of any service firm largely depends on the ability of the organisation in question to target, acquire, get hold of, and retain keep the ‘right’ customers. Good organisations are mainly based on cultivating customer retention relationships, as opposed to the acquisition/transaction mentality. Starbucks is one such organisation.

The firm knows that a loyal customer is often a reliable source of revenue for the firm for many years, and hence viable business. This has seen Starbucks launch the Starbucks Card (Starbucks, 2011) to facilitate customer loyalty. Starbucks has also embraced a philanthropic philosophy as a tool for promotion.

The company contributes to different non-profit organizations in a bid to enhance brand awareness and image among local communities.

Response to Case Study Questions

Starbucks’ problems and analysis of its failure

The coffee culture in Australia is both mature and sophisticated. By the time Starbucks ventured into the Australian market in 2000, the country already had in place a thriving urban café culture. The smaller boutique-style coffee shops are very popular with Australians because they offer personalized service, familiarity, and intimacy (Patterson et al., 2010).

Starbucks was unable to replicate the experience offered by the boutique-style coffee shops is Australia. Years of coffee drinking has seen many Australians develop a more sophisticated palate and as such, they are able to enjoy a stronger and straighter coffee with no need for flavours and syrup shots to disguise the taste (Patterson et al., 2010).

Coffee drinkers in Australia can be discerning and are therefore not easily dissuaded by foreign coffee companies (Patterson et al., 2010). Starbucks failed to adequately analyze the existing coffee culture in Australia, and this could have precipitated its failure.

Considering that Starbucks’ coffee is priced at a premium, the fact that baristas and the staff had limited time to engage with customers was proving to be counterproductive to the very premises on which Starbucks was built.

Imitation of Starbucks’ concept by such competitors as McCafe and Gloria Jean’s also played a role in the failure of Starbucks as customers could no longer identify Starbucks’ unique selling proposition relative to its competitors (Cateora et al., 2011).

Lessons for other service firms crossing international borders

A lot of service firms crossing international borders can learn a lot from the failure of Starbucks in Australia. One of the lessons learnt is that it is always important to recognize and appreciate the importance of local culture.

Companies keen on venturing into the international market must be prepared to encounter various obstacles (Cateora et al 2011). Multinationals should be in a position to adapt environmental differences between markets successfully.

Another lesson that firms can learn from the failure of Starbucks in the Australian market is that it is always important to keep sight of the principles that made you successful in the first place.

In the case of Starbucks, the company became successful by selling experience, and not coffee, as epitomised by the insistence on baristas and staffs to great customers warmly within five seconds of entering a Starbucks store, and also recalling the names of the most frequent customers (Cateora & Graham, 2007). However, when the company decided to implements KPTs, it lost sight of the very things that made it successful.

Starbucks External Analysis & Internal Analysis: Recommendations

Based on the foregoing arguments, the following recommendations are made to enable Starbucks enhance its business philosophy in the face of increasing competition and challenging business environment:

• Starbucks should continue to be more innovative in the design and development of new products. Such a move would impact positively on Starbucks’ business model.
• The company should consider partnering with other firms in foreign markets so that it can ride on the success of the local company. This would also reduce cultural resistance.
• Starbucks could also consider partnering with other unrelated firms such as airlines and multinational retail chains like IKEA and Wal-Mart, car washers, and cinemas.
• It is becoming increasingly important for firms to work closely with competitors (Walters & Rainbird, 2007) and as such, Starbucks should also consider entering into a partnership with fast-food chains in a bid to improve its coffee offer, in addition to fighting stiff competition from such direct competitors as McDonald’s.

Internal and External Environment of Starbucks: Conclusion

Starbucks sells experience, and not just coffee. The company’s stores are normally located conveniently on busy streets and in major malls that command heavy traffic. The company enjoys a superb distribution channel.

Until recently, Starbucks has relied heavily on word of mouth and its strong brand as the main marketing tools but with increased competition and imitation, the company has moved fast to enhance repeat business and customer loyalty. The company has had to contend with various legal, political, economic and social factors as it undertakes its business activities.

Starbucks failed in its maiden venture in the Australian market because by the time it was setting up shop in the country, Australians were already used to a coffee drinking culture that had been started by boutique-like coffee shops. These shops provided personalized, individualized and intimate service, something that Starbucks could no longer provide.

Also, Australian coffee drinkers had already developed a more sophisticated palate following years of drinking coffee, meaning that they demanded stronger and straighter flavor that did not require the use of flavors and syrup shots to disguise the taste.

The report recommends that Starbucks should consider forming partnerships with local coffee companies to avoid failure owing to cultural differences and business principles. Starbucks should also continue to be produce innovative products in order to capture the changing tastes and preferences of its growing consumer base.

Reference List

Buckstein, J. (2010). Savvy Shoppers in a Brave New World. Bottom Line, 26(4), 28.

Burritt, C. (2007). McDonald’s challenging Starbucks with cheaper coffee drinks. Web.

Bureau of Labor Statistics. (2011). Regional and state unemployment —2010 Annual averages. Washington, D.C.: Department of Labor.

Cateora, P. R., Graham, J. L. (2007). International Marketing. New York: McGraw-Hill Irwin.

Cateora, P., Papadopoulos, N., Gilly, M., & Graham, J. (2011). International Marketing. Ontario, Canada: McGraw-Hill Ryerson Higher Education.

Dicarlo, L. (2004). Dunkin’ Donuts Vs. Starbucks. Web.

ICO. (2011). Sustainability Inititives. Web.

Miller, C. C. (2010). Aiming at Rivals, Starbucks will offer Free Wi-Fi.

Moreno, J. (2008). CONSUMERS / Blending coffee and frugality / A once-piping-hot trend cools off as java lovers try to economize. Houston Chonicle, 1.

Northey, J. (2007). The Canadian coffee consumer: Understanding consumer preferences for Fair Trade coffee products. Ontario, Canada: A & I.

Patterson, P. G., Scott, J., & Uncles, M. D. (2010). How the local competition defeated a global brand: the case of Starbucks. Australasian Marketing Journal, 18, 41–47.

Starbucks. (2011). Starbucks to Expand Premium Single-Serve Coffee Offerings. Web.

Walters, D., & Rainbird, M. (2007). Strategic Operations Management – a value chain approach. New York: Palgrave.

Wall Street Journal. (2009). Dieting: Sugar is the New Fat. Wall Street Journal, p. A14.

World Bank. (2010). Global Economic Prospects: Fiscal Headwinds and Recovery. Washington, D. C.: World Bank.

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