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Starbucks Corporation April 2012 Case Solution
The main base of an activity system is the integration. Starbucks has recently entered into a whole array of new businesses. It is very important for the company to integrate the operations of its various business division (Porter, 2008), which includes beverages, food, whole coffee bean, and coffee-making equipment. All these activities have one thing in common, coffee. This shows that Starbucks is pursuing a related-diversification strategy. Beverages and coffee beans are very closely related as they can be categorized into one industry. On the other hand, coffee-making equipment is a completely different industry. It requires a whole set of different expertise. The company is taking a huge risk by diversifying into this sector. Coffee making equipment only contributes around 4% of Starbucks’ total sales. However, it needs to be kept it mind that technology development is one of the key support activities. The company is trying to keep pace with technological advancement as it had a disaster when it replaced its Versimo machines with single-push button coffee-maker machine, which directly affected core product’s quality. So, the risk that the company is taking worth the control it gets on this market.
Following questions are answered in this case study solution
Key Strategic Issues
Evaluation of Options
a. Product Offerings
b. Activity System
c. The Resource Base
d. Porter’s Five Forces
Case Analysis for Starbucks Corporation April 2012
1. Current Strategy
There are two main factors that help a given company in sustaining its competitive advantage, competitive defend ability and environmental consonance. In order to assess Starbuck’s competitive advantage, it is important to understand it. Schultz made Starbucks a global brand and added it into the Fortune 500 companies. He used “Starbucks experience” to take the company global and make it one of the most widely recognized brands. Later, in the year 2008, when he returned, he used the same “Starbucks experience” to bring back company’s former glory.
Starbucks offered a unique experience to customer with a combination of a number of factors. However, it was very difficult for Starbuck’s competitors to imitate its “Starbucks experience” as it was successful in positioning itself as a “third place” in consumers’ mind. However, competitors did had an alternative route to attack Starbucks, but the company successful defended itself by maintaining its market share. So, the company had strong competitive defend ability.
There are a number of environmental factors that can affect a company; these factors could be internal or external. In the case of Starbucks, during Schultz regime, there was high environmental consonance. During the period of 2000-2008, the company itself disturbed it competitive advantage that was responsible for the misfit between the environment and the competitive advantage. Otherwise, the fit between both factors was perfect during Schultz regime. This competitive advantage cannot be transferred to the new business like instant coffee, juices, food, and coffee making equipment, which the company has recently initiated (Seo & Lee, 2007 pp. 49-56).
i. Internal Analysis
The analysis reveals that the company has been indulged in related-diversification. The company has been using its resources in an efficient manner in pursuit of maintaining its position as one of global leaders in the coffee industry. Secondly, the company has diversified by not only using tangible resources, but also intangible resources. In fact, intangible resources have played a more important role than the tangible resources. Out of seven features of a product, there is only one feature that the company lacks, bundling. Starbucks have to maintain repute as a premium brand, which is why it rarely uses such strategies. One of the prominent features of Starbucks strategy is that it uses cannibalization. It has been offering substitutes like juices, instant coffees, and coffee making machines in pursuit of gaining market share (Heuvel & Timon, 2007 pp. 296-304).
ii. External Analysis
External analysis reveals that Starbucks competitors have forced it to pursue related-diversification. Competition posed by VIA, Nespresso, and K-Cups was skilfully tackled by Starbucks. Furthermore, it was found that there is intense rivalry prevalent in the industry. This suggests that it is very difficult to maintain one's market share, and a constant threat to company’s competitive advantage is present. Low switching cost of customers increases the bargaining power of the customers. Interestingly, it was Starbucks that taught its customers about premium coffee, and now customers are aware of high quality coffee. They can easily switch to Starbucks’s competitor, whichever provides “better” coffee than others (Dulcic, Gnjidic, & Alfirevic, 2012 pp. 1077-1084).
3. Key Strategic Issues
The main strategic issue that is faced by Starbucks was summarized by Jeff Bernstein of Barclays, “Do you realize the magnitude of the task you are taking on?” The company is pursuing aggressive diversification strategy after an aggressive retrenchment strategy. The magnitude of the change that the company is bringing within itself is huge. It has not only acquired new businesses but also expanded its main business, Starbucks coffee shop, in Asian countries. There is a very high probability that, in case, such an aggressive strategy is not closely monitored and evaluated by the company then it might disrupt, or even collapse in worst-case scenario, the value creation process, which is based on primary and supporting activities. Starbucks seems to be tackling competition in an aggressive manner, which might disrupt the alignment of its resources with the external environment. The company developed its competitive advantage for coffee shops over decades. It will be very difficult for the company to leverage its competitive advantage for other businesses. So, there is a mismatch between competitive advantage and the external environment (Very, 1993 pp. 80-92).
4. Evaluation of Options
There are two options that the company has. The first option is to stop the diversification strategy immediately and start working on building competitive advantage for its new products i.e. shift from revolutionary change to evolutionary change. This will help the company in leveraging its resources in a better way. Instead of market adaptation, the company should use resource leveraging. Up till now the company has been using outside-in perspective. It should start working with in-outside perspective for the time being until competitive advantages of other business have been developed (Wit & Meyer, 2010).
The second option that the company has is to continue with its current aggressive strategy and use outside-in perspective to shape its business system. It will help the company grow and expand in term of size. It will also enable the company to keep on leveraging its brand name to sell its product. The company will have to take special care of factors like a mismatch of organizational culture between the newly acquired company and Starbucks itself.
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