CASE ANALYSIS STARBUCK’S INTERNATIONAL OPERATIONS Course Name: Business Policy Seminar Course Number: MGMT – 690 Submitted By: Emaan Date: 14th November 2010 INTRODUCTION: Starbucks is one the most successful companies in the United States, which is evident by the fact that it is among the FORTUNE 500 Companies. However, over the last few years its profitability has declined owing to decline in Starbucks international sales and increased operational costs. The Chairman of Starbucks is a man who made this company what it is today so there seems to be a one-person decision making in the international expansion of the company.
Each country in which a company operates represents a unique environment with a different set of economic, technological, political, and sociocultural variables for the company to face. What seems to be the problem with Starbucks is that its international expansion policy was too aggressive and did not really take into account the differences between countries. Around the world, Starbucks is not sensitive to the feelings and demands of the local people who are the actual customers.
The company’s belief that what works in America will also work in other countries of the world, is not correct just because people want to experience the American lifestyle. ISSUE WITH STARBUCKS The Problem with Starbucks is that its top management went too aggressively on international expansion without considering the local demands with the belief that around the world they can sell the same “Starbucks’ Experience” at a high price. In other words Starbucks did very well in its own country, but could not manage international expansion properly.
Starbuck’s top management, specially the Chairman, is adamant on aggressive expansion without taking in view, different regional needs and values. He is expanding Starbucks around the world without making its outlets and products country- or region-specific. The top management is of the belief that what works for the United States will also work in the same way around the world. It is not that they do not acknowledge regional differences. It is due to the fact that they believe everyone around the world wants to follow the American lifestyle.
To some extent this may be true, but what they are forgetting is that people might find it nice and different for some time but will eventually go back to their traditional favorites afterwards. In addition, Starbucks was too aggressive in its international expansion that the management forgot about the local outlets which were making more money than the international ones. In local markets the costs were low and it was easier to train the staff so the company had more control over their operations. Whereas in the international markets the company had less control, the costs were high and training the staff was not possible.
Shortly, the Top management of the company is making a mistake when they are not considering Michael Porter’s Five forces model. The most relevant areas for Starbuck’s issue are: Bargaining Power of Buyers The Buyers are most important stakeholders for any company. These are the people who will spend their hard earned money to pay for the goods you produce. So when entering any market it is important to take care of buyer’s needs. The “Starbucks experience” that Schultz constantly refers to is really all he has to offer. But “experience” (store ambience, personalized service, etc. ) is a tough sell.
Specially when there are other competitors in the market who sater to local buyer’s needs and also the buyers feel that it is a company they can relate to. Similarly, if the Chairman of a company will speak in public against the religious or political views of a group of people, they will definitely retaliate. Even though, the company may clarify that it is the belief of the owner who is separate from the company, no one will take this explanation. Rivalry among Competitive Firms: A major problem for Starbucks is that, these days, you can get a good cup of coffee at a petrol station.
Starbucks’ astounding growth — it was opening eight new stores a day just a couple of years ago — was possible because of the dearth of good coffee elsewhere. As in recessionary times, customers are careful as to where they spend their money. If competitors are offering the same product at half the price, how long can a company hold its customers for the “experience” that is what’s happening to Starbucks who did not take into view the competitive forces at work, while expanding aggressively into different parts of the world.
SYMPTONS OF THE PROBLEM High operational costs due to so many shops opening everywhere Lack of training for the staff and suitable real estate for the stores Loss in sales as customers cannot pay a high price for coffee everyday when competitors are charging much less for the same Loss in sales as the customers believe the company is against their religion Low revenues from international operations due to complex joint ventures and licensing agreements ACTIONS WHICH STARBUCKS CAN TAKE: Alternative 1:
One alternative for Starbucks is to manage its expansions in a better way by keeping in view the cultural, social, lifestyle differences of its clients worldwide. It cannot go on charging a high price for its coffee, which it believes is not just coffee but an “experience”. There also seems to be a lack of internal focus as the company is more focused on expansion. Alternative 2: Another business strategy of Starbucks can be to take a two-fold action i. e. Domestic Business Unit: Should focus on more differentiation to face the hard local competition.
International Business Unit: Should focus on reducing costs to reduce prices; this will help in entering new low cost markets and gain more profits. Also continue with alliances in countries to reduce management focus and concentrate more on the Domestic Market. IMPLEMENTATION The company can implement the above strategies by: Use the best of their Economies of scale to reduce costs Starbucks is a big company. With every new restaurant, it can use the experiences from the past and also rotate trained staff in order to ensure that the best practices are transferred to new outlets as well.
In addition, they can reduce their costs by transferring technology and machines instead of relying on the local partners to arrange for them. Close down the stores which are not profitable for the company The Management should take a step to stop opening new outlets without careful analysis. Also they should look at the outlets which are making a loss. If the sales through those outlets cannot be increased then it is better to close them down rather than bearing further loss on them.
Offer “value” to the customers by lowering the price for coffee or introducing value deals Coffee is an everyday item. For many people it is a necessity rather than a luxury. If Starbucks continues to sell its coffee for a higher price as compared to competitors, customers will go to competitors as no one; especially the working class can afford to buy expensive coffee everyday. Thus Starbucks should make its coffee more appealing by either cutting the prices or making value deals like a coffee and muffin for an affordable price.
Thus Starbucks should be only about “experience” (ambience, outlet etc. ) but also about “value” especially in recessionary times like these. The management and company representatives should be sensitive to the world political situation and refrain from commenting on it in public If a large part of your revenue comes from the Muslim customers in the Middle East, it is not wise to say anti-Muslim comments or touch a very sensitive issue in public. This will definitely have negative consequences for the company’s sales and financial results.
APPENDIX A – FINANCIAL ANALYSIS If we take a look at the company’s income statement, we make a shocking discovery. From year 2000 to 2001 the Net Income for the company increase by 91 percent or it nearly doubled. However, from 2001 to 2002 it grew only 18 percent. For a company growing at 90%, the growth rate of only 18% is quite low. Secondly, the store operating expenses as a percentage of net revenues is also increasing showing that store expenses are increasing at a higher rate as compared to revenues thus resulting in lower net income.
Another thing in the financial data worth mentioning is that percentage change in store sales has actually gone down 3% for international stores, again strengthening our point that despite new stores opening, the sales internationally are going down. The best evaluation method for Starbucks will be financial evaluation by measuring the following: 1- It should measure the Return on Investment (ROI) for any new investment they made and for the old investments as well. ROI is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.
The return on investment formula: [pic] In the above formula “gains from investment”, refers to the proceeds obtained from selling the investment of interest. 2- The company should calculate the Net profit for each store to separate between profitable and non profitable stores. 3- Also they should measure the Net profit for each country to separate between profitable and non profitable countries. REFERENCE: http://library. corporate-ir. net/library/99/995/99518/items/178279/ar02_financials. pdf