Business Model Analysis of Starbucks

Starbucks Coffee company is headquartered in Seattle, Washington. It began in 1971 with just one retail store at Seattle’s historic Pike Place Market. Now it has become the leading brand and retailer in the world. Starbucks went public on June 26, 1992.

The main aim of Starbucks is to become the leading brand and retailer of finest coffee in each of its target markets nationally and internationally by selling the best quality coffee and related products, and by providing high class customer service. Starbucks purchases and roasts a high quality whole bean coffees to sell them with fresh, rich-brewed espresso beverages, different varieties of pastries and coffee related accessories and equipment’s. Moreover Starbucks also sells coffee and tea products strategically through other channels such as supermarkets and non traditional retail channels such as United Airlines, Marriott International, Barnes & Noble bookstores and Department stores.

More than quality coffee, Starbucks features a variety of hand-crafted beverages, pastries and in some markets, a selection of sandwiches and salads. Starbucks merchandise includes exclusive espresso machines and coffee brewers, unique confections and other items related to coffee and tea. Some of the Starbucks products are as follows;

  • Beverages:  Brewed coffees, Italian-style espresso, cold blended beverages, roasted whole bean coffees, tea products, fruit juice, sodas, and coffee liqueur.
  • Food:  Sandwich, Salads, pastries and ice creams
  • Non food items: Mugs, Travel tumblers, coffeemakers, coffee grinders, storage containers, compact discs, games, seasonal novelty items, Starbucks card, media bar.

Starbucks’s main mission is to be a global company. In order to achieve this it needs, the development strategy that Starbucks implemented to adapt with variety market and local need are: joint ventures, licenses and company owned operation.

The total number of Starbucks stores are 15,011 which are operated and 3,891 are licensed operation in US which are spread out in 50 states. For the international location, Starbucks’ store can be found in 44 countries outside of the United States and 1,049 stores are company owned operated in Australia, Canada, China, India, Germany, Singapore, Thailand and the U.K. and 6,506 are joint ventures and licensed operation.

Business Model Analysis of Starbucks

The business model concept is defined as the value a company offers to customers and the architecture of the firm and its network of partners for creating, marketing, and delivering this value in order to generate profitable and sustainable revenue streams. It also consists of a narrative of both how the business works and how it makes a profit. Schindehutte and Allen (2009) developed a framework in order to define the core competencies of a business model from an entrepreneurial perspective.

The most important component of the framework is concerned with value creation. Starbucks creates unique value through great customer experience and interactive service. The unique value proposition of Starbucks is best described by Howard Schultz: The idea was to create a chain of coffeehouses that would become America’s ‘third place’, a place where people could go to relax and enjoy time with others, or just be by themselves. Starbucks enhances the coffee experience for the customers by creating a relaxed environment within the store whilst offering consistently rapid and on time delivery.

Many companies pursue a resource-based strategy which attempts to exploit company resources in a manner that offers value to customers in ways rivals are unable to match. Starbucks’ customer value proposition is also based on its unique resources and capabilities. Starbucks capitalizes on intangible resources like brand power and image as a high quality coffee provider to attain its objectives. Starbucks also utilizes its immense human capital and expertise in product innovation, location selection, and its marketing ability to stand out as the premier coffee brand. Particularly, Starbucks utilizes technology extremely well, e.g. the heavy use of internet capabilities, social network marketing, rechargeable payment cards, and even new mobile apps help to ease and speed up the payment and ordering. Moreover, Starbucks has other competitive advantages based on its skills and specialized expertise, and valuable alliances. Starbucks has a skill set in creating and introducing innovative products into the market. These skills give Starbucks a competitive advantage to be an innovation leader, but not a copycat follower. It is essential to differentiate itself from rivals in the coffee industry. Last but not the least, Starbucks has abundant free cash flow and physical assets to fund and drive its strategic initiatives. Without these physical assets, Starbucks would not be able to aggressively expand in the market or fund further product research and development.

Another important component of the business model is the firm’s core competence. Core competencies are defined as a proficiently performed internal activity that is central to a firm’s strategy and competitiveness. The core competency can also lead to sustainable advantages. To be a sustainable advantage, the core competency must be hard to imitate or copy by rivals. For Starbucks, its core competency can be defined as high quality coffee and products at accessible locations and affordable prices, providing a community the coffee drinking experience. Its sustainable advantage resides in the intellectual capital of defining and leading the market. Starbucks stands out as a leader, mainly because of its good business model that can generate innovative products that consumers desire.

Starbucks is able to leverage its resources, both tangible and intangible, to create competitive capabilities and core competencies to form its business model. Starbucks achieves this by utilizing its human capital and expertise to constantly strive for excellence in product innovation. Furthermore, Starbucks is able to internally fund its growth strategy from sound financial performance.

However, Starbucks needs to take more efforts to innovate its business model. Specialty coffee shops copy or adopt the Starbucks model, which leads to Starbucks’ competitive advantage shrinking and this poses a serious threat to the company. In addition, the gap between customer’s expectations and perceptions of Starbucks is bigger. Many customers are not satisfied with Starbucks’ offerings as they were before. They think Starbucks charges a premium for coffee and experience, but actually it falls behind its promises. This may be because customers become more demanding while Starbucks’ ability to innovate value offerings is weak. Therefore, to keep its popularity and consistent growth, Starbucks needs to innovate its value-adding activities so as to innovate its business model.

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