Starbucks competitive advantage analysis

TO:  Kevin Johnson, CEO of Starbucks

FROM: Ibrahim AbdelMoteleb, Coursera student

DATE: May 19, 2020

SUBJECT: internal analysis of Starbucks

Researchers have showed that company effects, which is the performance resulting from unique attributes of the company, explains 80% of the explained differences in the firm’s performance. It became critical to understand the organization’s own activities, resources, and capabilities to be able to achieve higher profits and performance. Thus, creating a competitive advantage.

Competitive advantage:

Competitive advantage is an organization’s ability to outperform its competition.

Firms obtain a competitive advantage by doing specific activities and combines them in a unique way along with its resources.

Starbucks’ competitive advantage:

The coffee industry in the 1970s and 1980s before Starbucks wasn’t this profitable. It was dominated by price wars and cutting costs resulting in cheap poor-quality coffee.

Starbucks revolutionized the industry by introducing high-quality coffee beans. This authentic quality became their brand and their brand became their value proposition.

Howard Schultz realized that there is a niche that wants premium quality coffee, he found a market segment that was overshadowed by the coffee industry during that time. He found a business opportunity and redeemed it. It’s this way of thinking which made Starbucks what it is now. Starbucks shows true and authentic care for its customers, who are no longer a small niche segment. They try to do this in every step. They write your name on the cup, customize your drink, chat with you, and answer any questions. This personalized service became a competitive advantage.

Howard discovered the coffee bars in Italy and started to observe it and its effects. He took note of the friendly baristas and how they treat their customers as their friends and had genuine care of them. He noticed how these cafes offered comfort to their visitors. It was like a small community. This café mood where you can go do whatever you like whilst enjoying the place and coffee became a competitive advantage.

After Howard’s Starbucks grew and the customer segment grew, he noticed how he had had a new customer segment which the office workers. They needed quick service to be able to service them premium coffee efficiently. They found ways to reduce time and increase efficiency. They created the speed of service which became another competitive advantage.

Starbucks encourages its employees to take place of the customers and their perspective, to always observe and learn. This culture of strive to learn became a competitive advantage.

Starbucks’ human capital is very important to them. They hire employees who share a passion, they call them partners, they offer them excellent benefits and wages, and they frequently promote individuals from within its ranks to store

managers and beyond. This also became a competitive advantage.

Starbucks’ quality isn’t easy, it’s a long value chain and value network. It 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 outsource the procurement process; they train in-house people to handle it. They conduct rigorous tests, they pay a premium for higher-quality beans, and they developed relationships with the countries from which they import their beans. Ensuring that they only serve premium beans is their core competency and competitive advantage.

Starbucks’ novelty and creativity helped them create new flavors and roasts which also became a competitive advantage.

Barriers to imitate that can be used:

Causal ambiguity: it’s very difficult to determine which factor is the reason for Starbucks competitive advantage, it’s the combination of them.

Complexity: the factors that can cause Starbucks success isn’t that easy to manage. The supply chain is very huge and complicated. Their recipes are secretive. Very hard to replicate.

Tacit knowledge: can mainly be seen in their culture.

Conclusion:

Starbucks created all of its competitive advantages by observing customers and seeing things from their perspectives. They showed genuine care for their customers and that helped them grow. However, that wouldn’t have been possible if it wasn’t for their culture. They have a true passion to learn and grow, and a true passion for coffee. This perfect combination of care for customers and a passion to learn accompanied by Howard Schultz’s entrepreneurial skills shaped Starbucks into what it is now.

To ensure keeping this competitive advantage, Starbucks must keep its culture and keep listening to their customers and their needs, it is what made them and it is what will make them continue to prosper.

To sum it up in ARC (activities, resources, and capabilities) framework. (short summary not full description)

Activities: all activities related to customer service and relationship (CRM) such as the personalized service, all activities related to supplier (SCM) such as their rigorous tests, and their continuous observation of customers’ needs.

Resources: premium quality beans, brand, value network, human capital, organization’s culture, and niche coffee machines.

Capabilities: marketing, innovation, ability to learn, and embed what’s learned into the processes, entrepreneurial skills, excellent management of the supply chain, and customer relationship.