External and Internal Environments: Starbucks Corporation

External and Internal Environments: Starbucks Corporation

In this article, I will examine the food and beverage industry where Starbucks Corporation operates. I will assess the impact of the general environment on the company as well as the industry in which it operates. I will evaluate Starbucks’ efforts in addressing competition forces and predict possible ways of improvement in the future. Moreover, I will make an assessment of the company’s resources, capabilities, and core competencies as well as its external threats and available opportunities positing on means it can fix its weaknesses.

General Environment

Starbucks’ environment comprises factors within their control (internal factors) and factors outside their control (external or general factors) that affect the company’s daily operations (Mason, 2007). Since the general environment has a substantial consequence for the company’s operations and success, it is incumbent upon business executives to track the evolution of events and trends to take proactive action to remedy any unfavorable implications. A PESTLE analysis is a reliable strategic tool Starbucks’ executives can rely on to organize factors within the general environment and assess their impact on the industry and competing companies. Accordingly, the most significant factors within Starbucks’s general environment are political and economic factors. The company’s continued growth and retention of its international brand as one of the world’s largest coffeehouse companies heavily rely on these two factors.

Political Segment

It is based on the role of government in influencing business practices. Considerations such as regional integration, trade restrictions, tax policies, employment laws, political stability, and tariffs constitute political factors. The sourcing of the company’s raw material, coffee, is affected by politics. The company’s acquisition of coffee from overseas markets depends on the political policies, laws, and regulations in those countries as well as the existing trade relations with the United States.  It calls for the company’s adherence to social and environmental concerns raised by governments. The company also has to abide by fair trade practices and regulations as required by US authorities. Its position as a multinational makes it the subject of more government scrutiny.

Economic Factors

The economic recession occasioned by the COVID 19 pandemic is a major economic factor for Starbucks. Consumer purchasing power has no doubt taken a hit due to rampant unemployment. This has not necessarily resulted in a decrease in coffee consumption. Nevertheless, consumers are looking for lower prices. The company will have to comply with consumer needs if they intend to keep competitors like Dunkin’ Donuts at bay. The company’s response has been to leverage the power of mobile technology through a strategic partnership with Apple to offer consumers discounted coupons via the iOS app. Despite the world economic downturn, the overseas market still presents an opportunity for Starbucks’ revenue growth especially in developing economies. The rising cost of labor will be a factor to consider.

Five Forces of Competition

The identification and analysis of five competitive forces that shape Starbucks’s industry of operation can be achieved using Porter’s Five Forces model. The company’s successful growth relies on the effective management of these forces in the coffee industry. These forces that shape the company’s competitive landscape include:

  1. Consumer/Buyer Bargaining Power
  2. Competitive Rivalry
  3. Supplier Leverage
  4. Threat of Substitution
  5. New Market Entrants

The first two are the most significant in my view.

Consumer/Buyer Bargaining Power

The company’s massive consumer base exerts a massive force. Its international market, for instance, is at the mercy of individual consumers or groups of consumers. This consumer bargaining power is a consequence of the fact that consumers can easily shift their loyalty to competing coffeehouses if their tastes and preference are not met by Starbucks. Consumers can also substitute the company’s products with other products like instant beverages. Evidence of this force lies in the realization of the small size of individual purchases when compared to the company’s massive annual revenues. Consumer power is therefore only significant when considered collectively. The company has to prioritize consumer needs and strengthen its brand as strategic measures in countering this force.

Competitive Rivalry

Starbucks’s operations within the coffee industry have not gone unchallenged. They face the force of competitive rivalry from players in the foodservice and coffeehouses industry such as McDonald’s, Dunkin’ Donuts, Wendy’s, Subway, and Burger King. These players offer consumers an alternative if Starbucks services are not to their satisfaction. The company, therefore, has to offer a robust plan for strategic growth as a way of maintaining a competitive advantage in the market.

                                                           Future Improvements

The key to countering consumer bargaining power is improving customer satisfaction. This is rather counterintuitive in my view since it means acquiesce to the said force. Starbucks can improve consumer satisfaction by continuing to exceed their expectations. This means the company has to go in a quest for service efficiency. This will involve going beyond providing its consumers with their favorite beverage into providing consumers with a unique experience that carefully considers the layout of the coffeehouse in terms of décor, the attention to clients, the ambiance created by music, sights, and smells. All these will go a long way in helping the company to maintain customer loyalty. The company can also broaden its product portfolio to include unique foods and drinks. The company can also retain its consumer’s attention using promotional items and gifts whether free or for sale.

To maintain a competitive edge and country the force of competitive rivalry, Starbucks must continue to lead the way in product innovation. New products such as pumpkin spice lattes as well as non-dairy beverages such as coconut milk, soy milk, and almond milk must continue to be the norm. The company’s popularity has mostly been on account of its flexibility to adapt to changing consumer preferences. This approach can serve to improve its consumer base in predominantly tea-drinking markets such as China. A focus on China and other overseas markets alleviates the pressure to compete for consumers in the US economy. The move toward food sales is also a positive effort towards alleviating the forces of competitive rivalry within the coffeehouse industry. The company can also consider strategic partnerships to offer unique services such as weekend brunch menus.

Greatest External Threat

Starbucks Corporation’s greatest threat in my view is fierce competition from cheaper alternatives. McDonald’s and Dunkin’ Donuts, for instance, are not renowned for their coffee. However, they offer products similar to those offered at a fraction of the cost. Consumers naturally will favor these competitors over Starbucks, threatening their market share. Other firms also try to imitate the company’s business model including their unique look and feel. The company can counter such threats through successful marketing campaigns. The company can also rely on its key strategy of product differentiation through restaurant locations, unique products, quality coffee products, and superior customer service as a means of addressing the threat of competition (Davcik & Sharma, 2015). This strategy has and will continue to contribute to the superiority of the company’s brand making it difficult for competitors to imitate. Starbucks can also capitalize on its vast financial resources to pursue strategic alliances and calculated acquisitions in response to fierce competition.

Greatest Opportunity

Starbucks’ biggest growth opportunity is in overseas markets, especially emerging markets of India, China, Brazil, Mexico, and parts of Africa. These geographical locations have a growing middle-class population that provides opportunities to develop more coffeehouses and broaden the company’s consumer base (Mason et al., 2017. The company has already ‘dipped its toes’ into the Chinese market but there is still room for growth in that market. The key to growing these markets is an organizational strategy that gives store managers the latitude to tailor products, store format, design, price points, and menus to the tastes, needs, and preferences of local consumers within their localities. Exploring the international market is also a panacea for the increased self-cannibalization and saturation of the US market. Starbucks can continue to leverage its financial might, experience, efficiencies, and sheer size to widen its market share internationally.

Strengths and Weaknesses

Starbucks’s greatest strength market position in terms of presence and brand equity. The company’s geographical presence in the global coffee market is significant in over 80 countries together with a large market share of the US market which stands at 36.7%. Its brand is one of the most recognizable in the coffeehouse industry and is associated with customer service and product quality. The company effectively takes advantage of its brand equity through charging licensing fees for its brand logo and merchandising products such as gift cards and mugs. The company’s strength in the market and brand recognition places it at a place of better competitive advantage, superior distribution channels, and benefits of economies of scale to grow even larger domestically and internationally. The company’s greatest weakness in my view is the pricing of its products. The strategy of targeting premium customers with high-quality products and unique aesthetics has been largely fruitful for Starbucks. However, in times of economic upheaval (post the COVID 19 pandemic) consumers will likely forego the “Starbucks Experience” in favor of cheaper options offered by competitors. This model is also not ideal for penetrating markets in developing economies.

Resources, Capabilities, and Core Competencies

The company’s most prominent resource is its human resource. They are the company’s main asset since they are an interface between consumers and Starbuck’s brand. This importance is best demonstrated by the benefits Starbucks offers its employees including stock options, health care, and retirement benefits. The company also built goodwill with its clientele by paying attention to its corporate social responsibilities through community-friendly that practice that involve prudent waste management and recycling. Its core competency lies in its use of mobile technology efficiently through its mobile application as a way of boosting profit growth.

References

Davcik, N. S., & Sharma, P. (2015). Impact of product differentiation, marketing investments and brand equity on pricing strategies. European Journal of Marketing49(5/6), 760-781. https://doi.org/10.1108/ejm-03-2014-0150

Kourula, A., Moon, J., Salles-Djelic, M., & Wickert, C. (2019). New roles of government in the governance of business conduct: Implications for management and organizational research. Organization Studies40(8), 1101-1123. https://doi.org/10.1177/0170840619852142

Mason, A., Cole, T., & Goza, N. (2017). Starbucks: A case study of effective management in the coffee industry. Journal of International Management Studies17(1), 43-48. https://doi.org/10.18374/jims-17-1.4

Mason, R. B. (2007). The external environment’s effect on management and strategy. Management Decision45(1), 10-28. https://doi.org/10.1108/00251740710718935

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