Running head: STRATEGIC AUDIT: THE CASE FOR STARBUCKS
Strategic Audit: The Case for Starbucks
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STRATEGIC AUDIT: THE CASE FOR STARBUCKS
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Strategic Analysis
Starbucks has adopted a unique type of cost leadership. Cost leadership, as a business
strategy, involves gaining a particular advantage over the competition by lowering economic
costs that set it apart from competitors (Barney & Hesterly, 2019). The current business strategy
of Starbucks is based on selling coffee of the highest quality. As such, Starbucks's business
strategy focuses on product differentiation. A differentiation approach involves offering
consumers a unique product or service (Barney and Hesterly, 2019). Thus, the coffee chain
implements a differentiation strategy to increase their competitive advantage. Based on this
understanding, the coffee retailer pays special attention to the quality of its product offerings.
This explains why its consumers display a willingness to pay a premium or higher price for a
coffee. Starbuck also uses superior customer service to sustain its competitive advantage. This
has further contributed to the coffee chain giant's attractiveness. When it comes to corporate
strategy, Starbucks involves establishing itself as the leading source of exceptional coffee
globally while at the same time, remaining committed to the long-term growth of the company
(Starbucks, 2020). Thus, the guiding values of Starbucks' concerns providing their customers
with the guarantee of the highest product standards while maintaining a diverse product mix at
the same time (Starbucks, 2020). This way, the company can appeal to a diverse consumer base.
Consistent with Starbucks' corporate strategy, the coffeehouse strives to expand its business,
especially in developing industries. Business penetration in emerging markets has been for years
Starbuck's corporate strategy (Barney & Hesterly, 2019). Overall, this strategy has given the firm
a unique competitive advantage as the world's coffee chain retailer.
Performance Analysis
Starbuck's tracks its performance using multiple matrices such as monthly status reports
and other statistics. One of the most prominent measurements for the company is the financial
performance measure. According to statistics, Starbuck's latest EBITDA margin over the last
twelve months stands at 19.2 percent. When Starbuck's EBITDA margin is benchmarked against
competitors in the same related industry, such as Yum! Brands and Wendy's, which have an
EBITDA forecast margin of 32.7% and 23.5% respectively, it becomes clear that the two
companies are more attractive to investors than Starbucks ("EBITDA Margin for Starbuck's
Corporation," 2020). It also means that Yum! Brands and Wendy's Company have betteroperating efficiency compared to Starbucks. Another financial KPI that Starbuck uses is
Revenue Growth. If you look at the last twelve months, Starbucks ' revenue growth slumped in
2019 at -7.7 percent. Benchmarking the results to its competitors, Starbucks displays a dismal
run of results since Yum! Brands and Wendy's reported revenue growth increase by 0.6% and
6.0%, respectively ("Revenue Growth for Starbucks," 2020).
Starbucks also traces service performance to the American Customer Satisfaction Index
(ACSI) to benchmark every aspect of the customer experience with industry peers. ACSI is a
national economic indicator of consumer's experiences with a company's quality of services and
products. In 2019, Starbuck received an ACSI score of 79 in the Limited-Service Restaurant
category, which was higher than that of its main competitors, like Wendy's, which received a
score of 76 (ACSI, 2020). This ACSI rating emphasizes the relentless focus Starbuck's has on its
customer base and its commitment to its brand promise to deliver on customer expectations.
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Starbucks also uses an innovation strategy to boost its performance. Service innovation
refers to the change in a specific business dimension that positively impacts other elements of
service. Currently, as part of the service innovation of Starbucks, the coffee retailers launched
their rewards programs and mobile app as a way of increasing the information they collect and
use it to gain insights into their clientele base and retrieve data regarding their purchasing habits
(Marr, 2018). This way, the company can respond to customer demands. In turn, this plays a
pivotal role in helping the company direct marketing, sales, along with the business decision.
External Analysis
Starbucks operates in a perfect competition market characterized by four conditions:
identical products, no entry or exit barriers, information shared consistently with all participants
and the presence of many sellers and buyers. Because there are no barriers to entry and
information is that homogenous businesses usually make reasonable profits. The American
coffee shop industry is in a mature stage with medium level concentration and is continually
changing as the high number of players continues to compete for market share. Starbucks and
Dunkin Brands accounted for more than 65 percent of the market share (Brown, 2019).
Porters 5 forces framework is a tool that businesses use to analyze competition in the
industry (Barney and Hesterly, 2019). First, the coffeehouse experiences a moderate threat of
new entries. The coffee landscape industry does not have many barriers, and the true cost of
opening a coffee shop business is very high either. This means Starbucks can experience some
competition from new entrants. There is a significant variety of substitutes for Starbuck products,
including alcoholic and non-alcoholic drinks. Besides, some people prefer brewing coffee at
home. This makes the threat of substitutes higher for the Starbucks brand. Next, the bargaining
power of suppliers is low because Starbucks has partnered with suppliers around the world
(Matthews, 2015). Accordingly, buyers' bargaining power is high due to the existence of tougher
competition, which translates to a wide variety of choices for customers. Starbucks faces an
intense competitive rivalry due to the presence of both large and small coffeehouses. Considering
that switching is relatively low makes competition ever so high. Competitive rivalry and the
threat of substitution demonstrates that external forces remain significant but limited issues in
Starbuck's strategic management.
Internal Analysis
Some of the resources that form the basis for Starbuck's sustainable competitive
advantage include innovation capacity, marketing, financial resources, human resources, and
employees. At the same time, capabilities refer to what the organization can do with these
resources. This way, resources, and capabilities usually provide a sustainable competitive
advantage based on the four dimensions of (VRIO) Value, Rarity, Inimitability, and
organizational support (Barney & Hesterly, 2019). According to the first dimension of VRIO,
Starbucks has a strong brand image, which is the company's most pivotal strength. As a global
leader in the retail coffee market, global consumers acknowledge the company as a valuable
product and service provider. The brand image helps Starbucks to create a competitive advantage
over other competitors like Dunkin and Wendy's. The supply chain also adds value to the
company. Starbucks has adopted a vertically integrated supply chain, which implies that the firm
STRATEGIC AUDIT: THE CASE FOR STARBUCKS
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owns its entire supply chain and interacts closely with farmers. This way, the company is able to
maintain the same quality and flavor standards of all its coffee beans (Matthews, 2015).
Starbucks possesses rare resources that include secret menu items coupled with
distinctive flavors and premium coffee (Hseih, Tullo & Uy, 2020). These rare features make
Starbucks products and customer experience more superior compared to those of other
competitors like Dunkin. At the same time, imitating the firm's rare resources is next to
impossible, which gives Starbucks an edge from its competitors. While other companies can
somehow replicate customer service, it would be costly to imitate. Starbucks also organizes its
resources as a way of maintaining its leadership position in the coffee shop industry. Global
presence in over 30,000 locations plays a significant role in helping the firms generate revenue.
Based on this VRIO, it becomes apparent that Starbucks' strength lies in offering products of the
highest quality and avoiding standardization of quality. The premium prices of coffee pose some
threats for the company to succeed in emerging markets.
Conclusion and Recommendations
Undeniably, Starbucks continues to sustain a competitive advantage on account of
quality, particularly compared with other competitors. Part of the reason for this growth and
success has been due to the company's international business strategy. This way, Starbucks has
been able to implement its objectives. However, a problem that continues to plague the company
is the high number of stores in the U.S. that have led to Starbuck's market oversaturation. The
chain's many branded coffee shops and coffee-focused restaurants across different American
locations are cannibalizing sales. However, Starbucks can overcome this problem by investing
more in emerging markets of India, Russia, Brazil, Mexico, and South Africa. Since these
countries continue taking the lead in consumer market growth, they can provide significant entry
opportunities. As per Starbuck's internationalization strategy, the management teams must
consider transferring the company's core competencies and capabilities on a region-to-region
basis to tap into the potential growth in these marketplaces. This shows there a need for
Starbucks to develop unique strategies and approaches for each market as a way of making
Starbucks experience part of their culture. It is also recommended that the company needs to
focus on articulating an entry strategy through franchising in the market industry around the
world.
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References
ACSI. (2020). Benchmarks by Industry. Retrieved from
https://www.theacsi.org/index.php?option=com_content&view=article&id=149&catid=&
Itemid=212&i=Limited-Service+Restaurants
Barney, J.B., & Hesterly, W.S., (2019). Strategic Management and Competitive Advantage:
Concepts and Cases (6th Ed). London, England: Pearson
Brown, N. (2019, October 25). Nearly Four of Every Five U.S. Coffee Shops are Now Starbucks,
Dunkin' or JAB Brands. Daily Coffee News. Retrieved from
https://dailycoffeenews.com/2019/10/25/nearly-four-of-every-five-us-coffee-shops-arenow-starbucks-dunkin-or-jab-brands/
EBITDA Margin for Starbucks Corporation. (2020). Retrieved from
https://finbox.com/NASDAQGS:SBUX/explorer/ebitda_margin
Hsieh, C., Tullo, D., Uy, M. (2020, May 19). 36 Secret-Menu Starbucks Drinks You Can Order
to Feel Fancy and Extra as Hell. Cosmopolitan. Retrieved from
https://www.cosmopolitan.com/food-cocktails/news/a38276/20-things-you-didnt-knowyou-could-order-at-starbucks/
Marr, B. (2018, May 28). Starbucks: Using Big Data, Analytics and Artificial Intelligence To
Boost Performance. Forbes. Retrieved from
https://www.forbes.com/sites/bernardmarr/2018/05/28/starbucks-using-big-dataanalytics-and-artificial-intelligence-to-boost-performance/#1ece9b8065cd
Matthews, C. (2016, March 5). What Can We Learn from Starbucks' Supply Chain
Management? Retrieved from https://www.maistro.com/procurement/what-can-we-learnstarbucks-supply-chain-management/
Revenue Growth for Starbucks Corporation. (2020). Retrieved from
https://finbox.com/NASDAQGS:SBUX/explorer/total_rev_growth
Starbucks. (2020). The Best Coffee. Starbucks Coffee Finder. Retrieved from
https://www.starbucks.com/coffee