Question

• Based on your experiences as a coffee consumer, does Starbucks’ strategy (as described in Illustration Capsule) seem to set it apart from rivals?
• Does the strategy seem to be keyed to a cost-based advantage, differentiating features, serving the unique needs of a niche, or some combination of these?
• What is there about Starbucks’ strategy that can lead to sustainable competitive advantage?

You can also do some research on the Internet to support your response.

Answer 1

How did Howard Schultz build Starbucks’ sustainable competitive advantage?

01 -POSITIONING — TARGETING A NICHE

The first and foremost factor for sustainable competitive advantage is to position your brand inside a consumer’s mind. The ways to enter their mind is

a) Becoming a leader in an existing product/service category(It would need huge investments in money, effort & time and not a practical option)

or

b) Becoming first in any new product/service category. In other words, you need to create a new category.

If you plan to create a new category, then the conventional wisdom is to look for a niche market.

Finding a Niche Market. The general rule is to start small. Focus on a particular need, work on it, make your product distinctive and dominate the niche market. Smaller the segment, it is easier for the entire company to focus and meet the customer needs, wants and desires. Once you become a leader in the niche market, you could grow your market.

Starbucks’ Niche -By 1970s, three trends emerged -
1. Most of the Americans were unhappy with the coffee experience as it is made from cheaper Robusta beans. Particularly, the younger generation disliked the coffee taste. Robusta beans are of very inferior quality compared to Arabica beans.
2. Coffee beans packed in the cans and sold in the supermarket shelves were also going stale, affecting the tastes.
3. In the same period, people were becoming health conscious and began to cook their own food at home.

Starbucks founders saw that there is a considerable number of coffee lovers who were tired of all the available options and also looking for a naturally processed, authentic coffee beverage & was willing to grind the beans in their home. The founders, themselves being passionate about coffee, could understand the problems faced by those people. They felt that it was wise to meet the needs of this target segment. So they opened the first store in Seattle to sell authentic coffee beans to this tiny niche of gourmet coffee lovers. The brand’s quality spread by word of mouth.

02 -VALUE PROPOSITIONS

Value propositions are the differentiating factors that would establish and preserve the Brand’s name in a consumer’s mind as it was the next foundational step in building the sustainable competitive advantage.

Authentic Quality was one of the core value propositions of Starbucks from the very beginning. Till the mid-1980s, Starbucks was selling only coffee beans which a consumer had to take it to their home, grind them and prepare coffee on their own. To build a massive brand, to stay relevant and to build a sustainable competitive advantage, every brand has to evolve, add new value propositions and extend their market boundaries. And in the mid-1980s, the time was right for Starbucks to evolve.

02a -SELL EXPERIENCE AND BUILD RELATIONSHIPS

The Research-In the 1980s, Howard Schultz, visited Milan, Italy. He was surprised to see that every street in the city had a little espresso bar. He visited many stores and studied them. He saw that the Barista working behind the counter, greeted every customer cheerfully and many of them by their names. After taking the order, that guy moved gracefully, grinding coffee beans, pulling shots of espresso, and steaming milk, and at the same time, he was conversing happily with his customers. The Baristas talked, laughed and enjoyed the moment with their customers. Customers too enjoyed. Howard could see that the Baristas had established personal relationships with their customers.

Howard also observed that there was a wonderful camaraderie between the customers even though they didn’t know each other well except in the context of that coffee bar.

Howard continued to observe more coffee bars. He listened to the type of music being played. He saw that the coffee bar was visited by a different crowd at various timings. In the morning, the Coffee bar was frequented by typical office goers. In the early afternoon, mothers with children and retired folks lingered around. In the evenings, it was a neighborhood’s gathering place.

Howard realized that these places offered comfort, community and a sense of extended family to the customers. Italians considered coffee shop as an extension of their porch, an extension of their home-A home away from home.

“Everyone is interested in themselves, every customer needs special attention. They need preference — They need a special assurance that they are also one of the preferred customers. Preference brings loyalty. Preference makes the sale” -Marc Gobe

The Insights-Based on those observations, Howard perceived that the Starbuck’s connection to the people who loved coffee did not have to take place only in their homes, where they ground and brewed whole-bean coffee. For sustainable growth, the connection had to happen in the Starbucks’ stores. That was the most powerful, missing link Howard had been searching for. In Italy, drinking coffee was a social aspect. Howard felt that though Starbucks was in the coffee business, it was overlooking the social aspect of it.

Starbucks had been treating coffee as produce, something to be bagged and sent home like groceries. It had stayed one big step away from the heart and soul of what coffee has meant throughout the centuries-Howard Schultz.

The Solution-Howard felt that to grow the Starbucks coffee market, he had to sell an experience in his stores similar to Italian coffee bars and ‘espresso’ had to be at the heart and soul of the coffee experience. He began to serve espresso drinks the Italian way.

Experience is in ‘Attention To Details’-Howard carefully designed every store to enhance the quality of everything the customers see, touch, hear, smell and taste. He gave particular attention to ‘Aroma’ as it plays a vital role in the Store experience. He made sure that smell of brewing coffee alone would linger around to welcome consumers. He didn’t allow his associates to use perfumes as the beans would absorb any order. He had banned smoking. Also, he didn’t allow many food varieties and was choosy about cooking methods in order to maintain coffee aroma. He trained Baristas about the art of having happy conversations with the customers so that they could build personal relationships with them.

A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both -Michael Porter.

Howard Schultz chose the option of providing ‘Greater Value’ to his customers.

02b -SPEED OF SERVICE

As customers gained more knowledge about coffee, the interest in high-quality coffee grew and potential customers multiplied. One particular segment of customers among the new growing breed of coffee lovers got Howard’s attention-The office going customers. These customers worked in the nearby office buildings and they were always in a hurry. They had little or no opportunity to experience good coffee in the workplace. No one offered high-quality, quick service espresso for these office-goers. A different context and the same customer wants a different job to be done.

Howard Schultz sensed a potential opportunity.

Howard and his employees began to work on improving the speed of delivery. They found ways to reduce the time and improve efficiency in every step. One of the engineers Hap Hewitt invented a proprietary system for serving three kinds of drip coffee simultaneously, modeled after a beer tap. Baristas were given the training to improve the speed. Slowly, the ‘speed of service’ pulled more people into the stores and became one of the reasons for building a massive competitive advantage for Starbucks.

03 -ACTIVITIES

Starbucks has been performing hundreds of activities to render the chosen value propositions to customers. The company continues to tweak those activities. Setting a long-term competitive edge depends on performing different activities from rivals or similar activities in different ways than performing similar activities better than rivals. Let us see how Starbucks did some of those activities differently than competitors.

03a -ROAST

Competitive Strategy is about choosing a different set of activities to deliver a unique mix of value-Michael Porter.

Starbucks’ one of the core values is about delivering Authentic-Quality Coffee. The roasting process plays a vital part in providing the quality coffee and the company particularly relies on ‘dark roast’ as it brings out full flavors of coffee.

In the 1960s and 1970s, the leading coffee brands were competing on price and began to cut costs by adding cheaper Robusta beans to blends. On the other hand, Starbucks with an unwavering attitude towards quality always used premium Arabica beans.

This provided them an added advantage — Only premium coffees like Arabica can be subjected to the dark roasting process. The robusta cannot be roasted as it would burn them. On contrary, Arabica beans can withstand heat.

Darker the beans roasted, brimful the flavor, exquisite the aroma, and delicious the taste. Aroma and better tastes pulled more consumers to the stores.

Roasters-The roasters are promoted within the company and trained for over a year. It is considered an honor to be chosen as ‘Roaster’. Professional roasters are trained to use smell, sight, and hearing to judge whether the beans are roasted perfectly. The colors are tested through specially designed equipment. Even while the roasting process is on, a computer also would be checking the progress, using a robotic arm to pull out a small scoop of a sample. If the batch did not meet the standards, the whole batch would be discarded.

Starbucks cared only about quality. Thus, the brand was beginning to tailor its activities to deliver the good quality fresh coffee and dark roasted flavor.

03b -CONSUMER EDUCATION

Despite being an authentic quality coffee with Italian style beverage experience, Starbucks would have remained a very small niche player or would have vanished from the market if it had not invested in consumer education.

A brand has to build relationships in order to extend the loyal customer base. One of the ways to build relationships is not to talk about our product or service but talk about what is best for the customer, teach them the best practices for the customer.

The Starbucks original founders were passionate about the coffee and their mission was not to earn profits but to educate customers about the joy of world-class coffee, about the way of roasting & brewing the coffee and about maximizing the quality of the coffee. They never aspired to build a business empire. They loved to spend hours with anyone who had a genuine interest in learning about the world’s greatest coffees. They allayed the fears the customers had regarding coffee. This attitude spread to Howard Schultz and others in the company.

Baristas were motivated to develop deep knowledge of coffee. Their vital role was not to sell the beans but to help consumers make decisions on beans, grinding, coffee making and the making of espressos. It was about building a long-term relationship.

If you care about your customers, they would care about your product.

Howard is of the view that if we offer something that a customer is not accustomed to, something far superior to what they had imagined, then it would take time to develop their palettes. Through education, we could slowly create a sense of discovery and excitement and loyalty that would bond them to our brand.

“To mean something to customers, you should assume intelligence and sophistication and inform those who are eager to learn, If you do, what may seem to be a niche market could very well appeal to far more people than you imagine” -Howard Schultz

It’s not about us, It’s about them.

Starbucks was not just teaching customers about fine coffee but also showing them how to enjoy it. The brand was no more just a retail store.

03c -RESEARCH

Be The Customer — It is important to understand the needs, desires, fears, wants, and limitations of customers. To understand them, we need to observe them in detail. The more we observe them, sooner we begin to think from their shoes. As we began to think from their perspective, slowly we would become one of them. We are them and they are us. Once you make decisions from their perspective, your business would grow rapidly.

Jerry and Gordon, the original founders of Starbucks, had so much knowledge about coffee and were so much passionate about it. They brewed their own coffee. They themselves were the users -they understood the frustrations of not being able to locate a good coffee source, they could understand the pain of other gourmet coffee lovers.

Howard too became passionate about coffee. Like Jerry and Gordon, Howard Schultz was always hungry to learn. He learned about different coffees from various regions. He developed taste palettes for different coffees. He practiced the ways of roasting different coffee beans. He was proficient. He worked as a Barista. He learned the art of making coffee. He grew himself to be one of his target users. He lived as a user.

Observe, Learn — In the early 1980s, when Gordon and Howard visited Italy, they observed nearly 500 espresso bars in Milan and Verona. They took notes, photographs, and videos. They video graphed baristas in action. They observed customers and noted their local habits, behavior and their ‘jobs to be done’ within particular contexts. They also observed menus, interior decor, and espresso making techniques.

Howard very often would visit his stores as a customer and observe others for hours. This observation had given him a lot of successful ideas, given him ways to solve problems and had also supported him in decision-making. Without sound research, Starbucks would not have been like what it is now.

03d -HIRE RIGHT PEOPLE

A founder alone cannot build a sustainable brand. He or she would build a great company if he or she could find a colleague who had ‘shared common interests’ and who could bring different strengths to the company.

“If you have the right people, then the problem of how to motivate and how to manage people properly goes away”-Jim Collins

Howard, while recruiting employees, made sure that he chose people who shared his passion, commitment and goals. He believed that like-minded souls would create a far greater impact.

• One of Howard’s earlier recruits was Dave Olsen, who had spent ten years serving espresso drinks. Dave had personally experienced the excitement people could develop about espresso. He had been to Italy and spent hours observing espresso bars. He was madly passionate about good quality coffee. He had worked as a Barista. He had experience in hiring the right people, training Baristas and operating a cafe. He was as committed to the quality of coffee as Howard. In Starbucks, Dave took care of the quality of coffee and freed up Howard to build the Starbucks brand. Dave joined Starbucks, not for the money but for the Vision, Core Values and the team.

03e -PROCUREMENT

Starbucks’ quality begins with bean procurement and the company works directly with more than 3,00,000 coffee growers ensuring the quality and flavor of coffee beans. They never outsourced procurement process. They train in-house people to handle it.

Rigorous Testing -The procurement executives perform a series of experiments in order to choose beans with a proper balance of flavor, body, and acidity. They conduct “Cupping” tests to evaluate the aroma and taste.

Price -Starbucks buys only top quality coffee and always pay a premium above the commodity price of coffee.

Establishing Competitive Advantage -In the 1970s, most of the world’s coffee beans market was controlled by Europeans and Japanese. At that time, American Coffee brands had a bad name among the coffee growers as they were always looking for a cheaper coffee. Starbucks had a tough time to establish trust.

Starbucks meticulously worked on developing relationships with the countries from which it buys the coffee beans. Dave Olsen, Procurement in-charge traveled widely, worked for years to forge relationships with coffee growers. He made long-term contracts at fixed prices for some origin countries to gain protection against price fluctuations and also promised them to buy the entire yield over a fixed period. This was mutually beneficial.

Scaling Up the Competitive Advantage -Starbucks set a new precedent by winning the bid for Columbia’s highest quality ‘Narino Supremo’ Bean Crop. This crop grows only in special places and famous for colorful and complex flavor. It is widely used in premium blends. Starbucks became the exclusive owner of this quality beans in the world, helping itself to build a massive competitive edge. The company convinced Columbia’s coffee growers about its determination for high-quality coffee. The brand invested in setting up a special operational structure in the tiny town of Pasto in collaboration with the people for processing the ‘Narino’ beans.

Starbucks roasts the Narino Supremo beans to perfection and sells them to their customers without blending them with lower quality coffee. Thus the brand maintains its differentiation and the competitive edge.

Quality Vendors -The company even has its own Coffee and Farmer Equity (C.A.F.E) standards and Coffee Sourcing Guidelines (CSG), which require that all suppliers must meet certain ethical, sustainability, and quality standards. Starbucks uses a demanding selection process to ensure its growers meet and adhere to these guidelines.

04 TRADEOFFS

Starbucks owes their initial success to a unique strategic position involving clear trade-offs. Choosing a unique activity or a differentiation is not enough to guarantee a sustainable competitive advantage as competing brands could easily copy or imitate those value propositions and unique activities. But they would find it difficult to copy one thing — The Trade-offs.

Trade-offs are the activities a brand chooses not to do, the activities that would be incompatible with the brand’s vision and core values.

Without trade-offs, there would be no choice and thus no need for strategy — Michael Porter.

The desire to grow puts enormous pressure on the business owners and they make some compromises. They add a series of incremental changes which lead them to lose their way.

Quality and Price-Initially, to combat price war, Maxwell coffee house added a tiny amount of robusta beans in their existing coffee blend made from Arabica beans. Sensory tests showed that customers could not find the difference. As time passed, the consistent pressure on profits forced the Maxwell team to continue adding a small percentage of robusta beans in their coffee blends. By 1964, their coffee sales declined drastically and lost their position in the market. On the other hand, Starbucks from the very beginning never compromised on the quality of the product. Even when the price of Arabica beans was on the rise and it was tempting to take an incremental step of adding small robusta beans to the existing blend, Starbucks never did.

Quality & Flavor-In the late 1990s, there was a demand for artificially flavored coffee beans. Competitor brands were making compromises to please its customers by adding the artificial flavors in the roasting process. But Howard Schultz saw that this activity of adding chemicals to the roasting process is incompatible with one of the Starbucks’ core values — Being of authentic quality. He refused to pollute the high-quality beans with chemicals.

Franchising-The desire for growth forced every other competitor of Starbucks to expand quickly through the franchising route as it was the logical, quick and easy way to raise capital. But Howard Schultz never allowed franchising fearing the risk of losing the control of the quality of the product. He felt that franchisees are the middlemen who would stand between Starbucks and their customers.

Starbucks trained their own baristas. They controlled the entire supply chain. They roasted their own beans. They had a common work culture, unlike individual franchises. They gave the consistent quality of coffee in every store. They gave a consistent experience in every store. Companies that franchised too early and too widely lost the control of quality. Some of the competitors did grow through franchising but never developed a strong brand.

Selling in Supermarkets-By the late 1980s, many brands began to sell whole-bean coffee in supermarkets. Consumers welcomed the move. Brands like Millstone and Sarks sold volumes much higher than Starbucks. It was tempting for the Starbucks team to sell in supermarkets as they would have easily tripled their volume of sales. But Howard refused to entertain the idea of pouring the coffee beans into clear plastic bins, where they could get stale. He chose not to sell coffee beans in supermarkets in order to maintain a clear distinction from grocery store coffee.

The Benefits-By delivering one kind of value, Starbucks projected an image of consistency whereas his competitors were confusing their customers. Starbucks’ reputation grew. This trade-off showed its employees how the Starbucks’ management is seriously committed to the brand’s core values. It made the organizational priorities clear to all its employees. It helped the brand to build a strong internal brand culture.

Starbucks, by choosing not to do some of the activities, projected a consistent image of credibility and built a sustainable competitive advantage.

05 INTERNAL BRAND CULTURE

People First, Profits Last -One of the main reasons why Starbucks consistently outperformed the competition was its employees.

Employees are responsible for breakthrough customer experiences and those employees are shaped by the company’s culture.

Howard Schultz in his earlier years of retail business realized that his storefront Baristas had the potential to influence customer experience as they were the interface between the store & the customers. It was important that their daily behavior with customers reflected Starbucks’ values and aspirations. Baristas need to have a passion for coffee.

Howard Schultz writes, “In a store or restaurant, the customer’s experience is vital: One bad encounter, and you’ve lost a customer for life. If the fate of your business is in the hands of a twenty-year-old part-time worker who goes to college or pursues acting on the side, can you afford to treat him or her as expendable?”.

Partners, Not Employees -Like Sam Walton of Wal-mart, Howard wanted to share the ownership of the company and the rewards of financial success with the people of Starbucks. He introduced ‘Bean-Stock’ and offered stock options for his employees. He paid more than the going wage in restaurants and other retail stores. He offered generous health-care benefits that weren’t available anywhere and he extended the benefit to part-time workers too. His thought was if he could link everyone to the performance of the company as a whole, every employee would have the same attitude, morale, and spirit as the CEO. Starbucks has a lower attrition rate in the industry.

-Howard also believed that if we treat people like a family, and they will be loyal and give their all. It would cut the costs of training and recruiting.

-If the company could treat the associates well, then the associates would treat the customers well. If the customers were treated well, then they would visit the store again and again. Real profits in business lie in ‘repeat customers’

Transparency -Howard and his management team were honest with their employees. They shared every information, be it expansion plans, profit details, inventory, purchases or sales figures. It built trust and confidence in his employees.

Commitment -Howard Schultz introduced a ‘Mission Review’ system where every employee in each store would be given a postcard size comment card and encouraged to report to the ‘Mission Review’ team if they saw a decision that did not support brand’s mission statement. Though Howard was worried by the thought of a team of employees monitoring the top management, he realized that he had to show his employees that he is fully committed to the brand’s core values. He had to show the sincerity of management towards mission statement. So he implemented the idea. It helped the company to maintain higher standards and also provided an important avenue for open communications with the employees.

Respect -Howard fostered an atmosphere in which people were treated with respect which was essential to the mission of Starbucks.

Freedom and Authority -He gave enough autonomy so that his partners can think freely, experiment on their own, make their own decisions and implement their ideas.

-Howard Behar joined Starbucks in 1989. He was already familiar with the company as a consumer. After joining, he frequented the stores and spent considerable time talking and observing customers and baristas. In his research, he figured out that many customers wanted Starbucks to offer nonfat(skim) milk for the reasons of health and weight. But Howard Schultz and the other top leadership rejected the idea, sticking adamantly to the Starbucks’ core values. Schultz did a lot of tasting tests with nonfat milk and every time, he disliked the taste. He felt that he would be diluting the authenticity and taste of the product. Everyone including store baristas opposed Howard Behar pointing out the operational difficulties in handling two types of milk. But Behar was determined to try it out. He didn’t wait for anybody’s approval. He convinced half a dozen stores to volunteer to try nonfat milk. And it was a massive success. Within six months, all other stores offered nonfat milk.

It would be tough for a brand to maintain the competitive advantage for a long time without a wonderful internal brand culture. The way a company culture shapes the product/service is considerable and is largely irreproducible.

A competitor can copy features of market leader’s product features, but cannot get the feel of employee’s inputs, working environment effects, work ethic’s influence, and emotional resonance-Michael Porter.

06 REINFORCING ACTIVITIES

DEEPENING THE STRATEGIC POSITION THAN BROADENING IT

Starbucks chose activities in such a way that it not only complements but reinforce one another forming a chain link and thus building the competitive advantage. Fit among activities locks out competitors, reduces cost and increases differentiation. These reinforcing activities cut across many functional areas and strengthen the whole system. They enhance differentiation and amplifies trade-offs.

The more the activities that are different from rivals and reinforce each other, the more sustainable the competitive advantage will be. What are those reinforcing activities of Starbucks?

06a -HIRING PEOPLE SMARTER THAN YOU

One of the reasons why Good brands failed to become great brands is that they were afraid of hiring people who are far more experienced, knowledgeable and who had better leadership skills than the founders. Even if they have hired those people, they failed to cede control and authority to them in certain domains. A founder may not have all the skills needed to build a sustainable brand. Hiring the right people who were successful earlier in particular expertise and who could share the brand values would have made the difference.

Howard Schultz, on the other hand, hired experienced people who were strong-willed, self-reliant & confident, who would not be afraid of debating with him, and who had tasted success.

-In the late 1980s, competitors were fast catching up with the Starbucks. Howard saw that the best way to jump ahead of the competition was to open as many stores as quickly as possible. But then he had no retail experience that could help in achieving this goal. What did Howard do? He hired Howard Behar, who had 25 years of retail experience in the furniture business. Howard Behar was extremely familiar with the process of opening and running many retail stores at once. He helped Starbucks to expand rapidly. It was one of the primordial reasons behind establishing a strong competitive advantage.

-As Starbucks was expanding rapidly, the organization was also growing and becoming complex. A small company management rules are no more applicable. The company may collapse altogether. What did Howard do? He hired Orin Smith who had broad experience managing far larger and more complex organizations. Both Orin and Behar were older than Howard Schultz. Being experienced, they could anticipate the pitfalls of growth and plan and react accordingly.

The experienced people brought in attitudes, values and leadership skills that were different from the founders. Howard Schultz was initially apprehensive of delegating of power but then he went ahead and handed them the authority, for the benefit of the company and its customers. Today, he concludes that if he had stopped those people from performing, Starbucks would have never matured into a sustainable company with strong people-oriented values. Howard handed them the authority to do what they needed to do. He made departments report no more to him but to them.

On contrary, Starbucks’ competitor brands continued to hire inexperienced people and went out of radar.

06b -TARGET NON CUSTOMERS

In the year 1994, the Starbucks business model and the logo were being copied around and threatened the brand’s growth. Howard Schultz had to do something quickly to jump to a new level. He believed that the best way to jump far ahead of competition was not to fight his competitors on the same features or elements but create a new dimension where there would be no competitive forces. He was looking for a strategy to grow the market rather than just aiming to grow the company’s market share. If our goal is to increase our brand’s market share, we would be unknowingly looking at our competitors and we may not succeed.

Focusing on existing customers will break the existing market into finer segments, forcing us to tailor the offerings further, and reducing the market further. To break away from this, the first step is to shift your focus from “Customers” to “Non-Customers” -from Blue Ocean Strategy

To grow the market, Howard Schultz began to look for ways to attract non-customers. He wanted to leverage Starbucks’ existing infrastructure and brand value for new coffee products that could be sold far beyond their stores.

Frappuccino-Starbucks’ research team observed that there would be some demand for some sort of blended coffee beverage among non-customers. They experimented by adding and mixing various constituents. They arrived at a drink of particular combination. They launched the beverage in a couple of stores. They tweaked it. The results were great. Then they launched it nationwide in the year 1995. Starbucks’ team expected to sell around 1,00,000 drinks in the first week but they sold around 2,00,000 drinks. The iconic ‘Frappuccino’ drink was born. A couple of weeks later, the sales were around 8,00,000 units.

Frappuccino changed the trajectory of the company by bringing in new customers who were not normally coffee drinkers and filling its stores in afternoons and during warm weather when coffee business was typically slow. Starbucks is no more reliant on the holiday season.

After seeing the sales, Howard Schultz suggested the idea of a bottled Frappuccino in collaboration with Pepsi. By the summer of 1996, Starbucks® bottled Frappuccino® chilled coffee drinks were arriving in grocery stores. Pepsi’s tremendous distribution network moved Starbucks brand name seamlessly into the mainstream market and drastically improved its brand awareness.

The Innovation-Explosion-In the early 1990s, Starbucks’ R&D team discovered that they could capture coffee’s flavor and aroma in a concentrated extract. When they ran the tests with coffee made by those extracts, the results were encouraging. This extract opened a whole new possibility for Starbucks — It had a strong weapon to grow the coffee market. They could attract more non-customers. The brand could easily fight against non-consumption.

Starbucks began adding coffee extract in a wide range of products including coffee-flavored beer, coffee ice cream, ready-to-drink bottled beverages.

For Ice cream Coffee, Starbucks partnered with Grand Ice Cream who had a nationwide distribution network. Starbucks became number one premium coffee ice-cream brand in the United States with very little promotional expense. New products showed that Starbucks is dedicated to innovation. Howard and his team re-imagined the coffee experience.

Instead of looking at competitors, Starbucks always found a way to grow the market by targeting new non-customers and built a massive competitive advantage.

06c -FLAVOR PACKS

The competing brands in the specialty coffee business felt that it would be impossible to expand its business nationwide as the quality of coffee would suffer. The prevailing wisdom at that time was that the whole-bean coffee business would always have to remain local, with stores close to the roasting plant. The reason behind this was that the beans would lose their freshness and flavor if it was shipped to stores, located thousands of miles away.

Howard Schultz and his team were not bogged down by those thoughts. They kept experimenting. In 1989, they found a solution. They innovated a special kind of vacuum packaging called ‘Flavor packs’ with a one-way valve to allow Carbon dioxide gases to escape without letting harmful air and moisture in. Suddenly, Starbucks had an opportunity to sell and serve coffee with the highest freshness standards even in stores that were located thousands of miles away from their roasting plant. It eliminated the constraint of building a roasting plant in every city.

Flavor packs made the rapid Starbucks expansion strategy practicable and achievable.

06d -OPINION LEADERS

As Starbucks was planning to open as many stores as possible in quicker time, it had to make sure that every store succeeds in a short time. Howard knew that advertisements would not be a feasible solution. He felt that the best option would be to spread the brand’s value through word of mouth and build an expectation.

A business idea can spread rapidly among its potential customers only if the brand lets the interested consumers market to each other. The way forward is, to design and deliver communication targeting ‘Opinion Leaders’ in a community.

Opinion leaders are the people in a community who have enough ability to influence other individuals’ behavior frequently in the desired way. They have better exposure, have sound knowledge in a particular domain, more cosmopolitan and open to exploring & experimenting. They have earned their reputation among the early majority. They have greater interpersonal networks which allow them to serve as a social model. People look forward to them for opinions, suggestions, and feedback.

Who are the opinion Leaders for Starbucks? Starbucks had been serving some customers through mail order from the 1970s. They were mostly travelers or who recently moved away from Seattle. They were passionate about coffee. They had sound knowledge of the sources of coffee beans. They knew how to roast and brew coffee. They were the real coffee connoisseurs. They were affluent, highly educated, well traveled, technologically savvy and well interested in arts. They have a got a massive inter-personal network. Their behaviors were mostly imitated by the other members.

Starbucks people loved interacting with them due to their shared interests. In the year 1990, Starbucks invested in a small dedicated phone and computer system to support this customer base. The mail-order customers had become very loyal to the brand.

Before Starbucks expanded nationwide, these ‘opinion-leaders’ were already spreading the awareness of Starbucks coffee among their network. It made sense for Howard to leverage this customer base. He began to open stores in cities and neighborhoods where these loyal customers were clustered. Every opinion leader was invited for the opening of the stores located within their neighborhood. Starbucks gave them coupons to invite their friends to the opening ceremony.

Starbucks’ mail order customers played the role of ‘Opinion Leaders’, creating the needed ‘brand awareness’ before opening a store in their neighborhood and attracted people’s attention.

06e -REAL ESTATE STRATEGY

For a retailer, choosing the right site is such a critical part for sustainable competitive advantage. The right location would help in increasing brand awareness.

Hiring -With an addition to the technical knowledge, Howard always hired people who were passionately committed and inspired by Starbucks’ core values to handle real estate selection and development.

Location -Starbucks opened stores in highly visible locations, downtown office buildings or in densely populated urban or suburban neighborhoods, near supermarkets. Though choosing a site was a time-consuming process, Howard and his team were willing to spend. Out of 1000 first stores opened by Starbucks, they closed only two locations. Not many could boast such a record. Many of Starbucks competitors had picked up wrong real estate locations and they failed to walk away when the economics did not work.

Hub and Spoke -In the later years, the Starbucks team refined real estate strategy by adopting ‘Hub and Spoke’ model. Upon entering a region, Starbucks typically opened outlets in a larger city that would also serve as a centralized facility like a hub, providing the logistical and managerial support for further expansion. By leveraging the hub’s operational infrastructure, Starbucks quickly opened stores in nearby smaller cities and suburban locations like spokes of a wheel. This helped in the rapid expansion of stores. In one year, they could open around fifty stores.

Market Saturation -Like Wal-mart, Starbucks clustered their stores in important locations with the intention of increasing brand awareness & increasing market share and they ultimately saturated the market. Howard saw that potential benefits of store clusters outweighed its drawbacks. It helped to manage store traffic and maintain speedy service. Howard Schultz hated to lose customers by means of late service. The saturated market at important locations further deterred competitors from entering the market.

06f -MUSIC

One of the competitive advantages of Starbucks is ‘Espresso Experience’ and music has played a pivotal role in their stores for over forty years. They were the pioneers in integrating the music into a retail environment.

Starbucks goes the extra mile to choose an interesting, cool music that a customer would have heard rarely and which would sound beautiful in a coffee shop. One of the Starbucks executives writes “It’s the music that we’d want to hear on Sunday morning in our home when we’re reading the paper and drinking coffee”.

Many customers, after listening to the music had enquired where they could buy it.

Starbucks also gave new artists a larger stage to share their talent and the brand benefitted from enhanced brand awareness and increased sales.

Starbucks never wanted to remain as a coffee brand but a lifestyle brand and music helped it.

06g -HELPING FARMERS

Starbucks has realized long back that the success of the brand is linked to thousands of farmers who grow their coffee. The company has been investing in improving the farmer’s life as it would ensure a long-term supply of good quality coffee.

Loans -Traditionally, small coffee farmers were dependent on single payment at the end of the harvest season. But they needed money throughout the whole season to cover personal expenses and farm-related expenses. At the end of the season, when climatic changes affected the whole coffee crop, it wrecked havoc in a farmer’s life. To help them overcome those problems, Starbucks provided short and medium-term loans to farmers and encouraged them to invest in upgrading the infrastructure.

Information & Training -Starbucks, with the help of their research and design facility, shared information regarding soil management techniques and crop production. They helped farmers to gain advanced knowledge, trained them to adopt new techniques.

The company also taught them ‘Ethical Coffee Farming’ methods and sustainable practices. They donate millions of disease-resistant trees every year to help farmers fight threats like ‘coffee leaf rust’. This made farmers to improve the quality and the yield of coffee beans which in-turn improved the profitability for them.

Community Support -Starbucks also provided leadership training and leadership opportunities for the farmers, particularly women. They also provided funds and support for educating the children, clean water and sanitation in those communities.

Every activity improved the life of the farmer which enhanced the coffee bean’s quality and a guarantee for the long-term supply of beans.

Entry Barriers -As Starbucks quickly established itself through long-term fixed-price contracts with high-quality coffee growers from most of the prominent locations, the company gained the first mover advantage.

Starbucks’ direct interaction with growers, along with their sourcing and social responsibility standards, made suppliers feel like they are an integral part of Starbucks’ corporation. The Starbucks’ community level involvement has further strengthened the loyalty. This has set a high entry barrier for a potential competitor to source good quality premium beans on large scale.

Bargaining Powers Of Suppliers -Most of the premium Arabica coffee growers are poor farmers who own small-sized farms. They do not have the scale to negotiate the prices. Most of the farms were unrelated and not unionized to demand a price rise.

Arabica beans are highly susceptible to changes in weather. The poor farmers who grow those beans are often in a vulnerable state. They look for a long-term association with a vendor who could understand their situations and work with them. They are dependent on Starbucks.

07 THE ROASTING FACILITY

The roasting of the coffee beans is vital to Starbucks’ experience. The roasting facility is custom-designed and follows a fully automatic proprietary process that reduces greenhouse gases, improve performances, create a high-quality coffee product and offer flexibility for future requirements. The plant was designed by a team of experienced professionals from multiple fields and was designed over a period of 3–5 years.

• Unlike its competitors, Starbucks uses a proprietary extraction process as the best beans need a advanced technology.
• The company also developed a proprietary process that removes bitter and acidic flavors, while preserving flavors that are rich and robust.
• Once the beans reach the roasting facility, the systems are so much automated that the beans are never touched again by human hands. During the process, the beans are always inside the process pipes or equipment.

Cleaning & Sanitation -In most other coffee processing plants, interior surfaces of pipes, vessels, process equipment are cleaned only after the last bit of beans have been processed. But Starbucks plant has Clean-in-place(CIP) system, where everything is cleaned right after each step is finished. Instead of manual switchover, mix-proof valve technology enables fast, efficient, highly sanitary operations.

Centralized System -Starbucks has installed state-of-the-art computer integrated manufacturing systems that allow personnel to access real-time information regarding operations, QA and maintenance. Almost everything in the roasting facility system is connected centrally to the Starbucks’ office network.

The operations at the processing plant are managed in control rooms and employees do not need to have direct involvement with the machinery, allowing them to focus on other significant factors, such as quality. Centralized automation has also drastically reduced the number of people required, thereby saving time and cost.

The roasting facilities have advanced packaging machines to handle various packaging sizes.

The company’s close control over the roasting process also ensures that Starbucks’ coffee tastes the same in all of its retail locations.

08 NETWORK EFFECTS

In 1987, Starbucks opened its first store in Chicago. Howard expected that the store would be a massive hit as the climate was colder for most of the time. Unfortunately, the sales were very slow. People were not thronging his stores as expected. But by 1990, after three years, the sales began to soar. The customers began to like the coffee taste. Many switched from drip coffee to Cappuccinos and Cafe lattes. The customers began to love the roasted coffee.

What happened here? -It took more than three years to reach a critical mass so that the idea could spread.

One crucial concept in building a retail business’ competitive advantage is understanding the ‘Critical Mass’ — The point at which the business becomes self-sustaining, a point where customers bring more customers. The rate of adoption accelerates. With every additional Starbucks consumer, a new potential customer assumes that ‘everybody else’ is drinking Starbucks coffee. As psychology says, ‘An individual’s action to try Starbucks often depend on a perception of how many other individuals are drinking Starbucks coffee’.

Michael Porter calls this as ‘Demand-Side Benefits Of Scale’-This arises in industries where a buyer’s willingness to buy a product or service increases with the number of buyers who also patronize the company.

As the number of consumers increased, the perceived value of the Starbucks’ service increased. It prompted more non-consumers to try the product. It improved the trust among existing consumers. As Starbucks attracted a wide variety of consumers, product options widened and innovations increased. As product varieties swell, the more people used the service. The more the users, more the data, more the user experience, more the right recommendations. Network Effects discourages potential competitors.

09 SUPPLY CHAIN MANAGEMENT

A well built and run supply chain is the one which makes sure that a customer receives a good cup of quality coffee on time. Starbucks uses a vertically integrated supply chain controlling every step from the sourcing the coffee beans to serving the cup of coffee to consumers.

The Source -Starbucks never outsourced procurement process and controlled the quality of coffee beans. The brand’s relationship and community building initiatives followed up fixed-term contracts have ensured a long-term supply of coffee beans.

The Hub -The green coffee beans are brought from far-flung areas through ocean containers. From the ports, the beans are sent to roasting facilities. The roasting facilities are located in a region where the product would be sold. This greatly reduced transportation costs and lead time. Each plant is capable of producing 1.5 million pounds of coffee beans per week.

Starbucks owns private roasting facilities with highly specialized capital equipment in various locations including California, Nevada, Pennsylvania, South Carolina, Washington, and the Netherlands. Starbucks’ sales volume allow these roasting facilities to be strategically positioned in order to support various stores in nearby locations as a ‘Hub and Spoke’ model and save cost & time. For example, The Nevada roasting facility serves California, Nevada, Utah, and parts of Arizona and the Asia Pacific.

By only using a handful of storage facilities, Starbucks can closely manage the sites’ operations and guarantee that all beans are roasted and packaged in the exact same way.

After roasting and packaging, the beans are sent to large regional distribution centers(DCs) or small warehouses called Central Distribution Centers(CDCs). From here the beans and other items are sent to local stores like ‘Hub and Spoke’ model.

The Operational Efficiency -Starbucks owns and controls some of the distribution centers while some are operated by a private partner. There’s a strong vetting process to choose the vendor. The productivity and contract rates were closely monitored by a ‘Score-card’ system which provides outputs in terms of service-metrics, cost-metrics, and productivity metrics. This allows Starbucks to continuously find a way to reduce costs and improve the efficiency of the system.

The Fleet -Starbucks team constantly analyze supply chain’s transportation costs by region and by the consumer. This allowed them to retain only the efficient and cost-effective transportation vendor. Starbucks has dedicated truck fleets that ensure on-time deliveries.

Replenishment System -Starbucks also uses an automated information system that allows it to monitor demand, inventory, capacity, and scheduling in real time. This allows Starbucks to quickly calibrate or alter its plans or scheduling as per the requirements, thus achieving a high level of efficiency and building a competitive advantage.

An automated POS system links all the outlets and replenishes the inventory as soon as the orders are served. This centrally integrated supply chain model also helps the company to predict demand so that they can adjust their expansion strategy accordingly.

Security -As the supply chain’s complexity increased, Starbucks introduced “Enterprise Security Platform” to monitor critical facilities and monitor operations at the retail outlets.

Many of Starbucks’ competitors failed or fail to grow because they did not invest in the people, the systems and the processes they need.

CONCLUSION

We could cover only limited activities in this article. Starbucks thought every activity from the customer’s perspective and made them distinctive and strengthened the fit among activities. A competitor copying only a few activities would fail to compete and it would be tough for anyone to copy all the activities and inter-relationship. The brand communicated the core values better to those customers who should value it.

There is one more major factor which we should acknowledge as a reason for building a strong competitive advantage-Mr.Howard Schultz. His strong leadership played a decisive role. He was curious. He learned everything quickly. He worked as Barista. He did his own observational research. His research helped in making the right decisions. He provided the discipline and guidance to choose the activities that would fit the brand’s core value. He was under constant pressure to compromise but he prevailed. His choices of what not to do, made the whole company rally behind him.