How Did Starbucks Build Its Sustainable Competitive Advantage? -Business Strategy and The Key Success Factors
An English teacher, Jerry Baldwin, History teacher Zev Siegel and Writer Gordon Bowker, inspired by a coffee connoisseur & entrepreneur Alfred Peet, opened their first Starbucks store in Seattle on March 31, 1971.
Due to financial difficulties in the mid-1980s, they had to sell their stores to their former manager, Howard Schultz. In the year 1986, Starbucks had only six stores. Howard, then re-imagined and re-invented Starbucks. As of 2018, the company operates stores at 28,218 locations worldwide.
How did Howard Schultz build Starbucks’ sustainable competitive advantage? What are the success factors?
Note: The below content is part of the following book.
01 -POSITIONING — TARGETING A NICHE
The first and foremost factor for a 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)
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, 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, the easier it is for the entire company to focus and meet the customer needs, wants and desires. Once you become a leader in your niche, you could grow your market.
By the 1970s, three trends had emerged -
1. Most of the Americans were unhappy with the coffee experience as it was made from the cheaper Robusta beans. Particularly, the younger generation disliked the taste of the coffee. Robusta beans are of very inferior quality compared to Arabica beans.
2. Coffee beans packed in cans and sold in the supermarket shelves would often go stale, affecting their taste.
3. During this period, the people were becoming health conscious and cooking their own food at home rather than dining out.
Starbucks founders realized that there was a considerable number of coffee lovers who were unhappy with the available options and were looking for a naturally processed, authentic coffee beverage and were even willing to grind the beans at home. The founders themselves being passionate about coffee could empathize with the problems faced by those people. They smelled a market and were ready to meet it. With that in mind, 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 help establish and preserve a brand’s name in the consumer’s mind. They are integral to building a 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 the consumer could buy and take home, grind and prepare their own coffee. 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 its market boundaries. And in the mid-1980s, the time was right for Starbucks to evolve.
02a -SELL EXPERIENCE AND BUILD RELATIONSHIPS
Brand evolution means adding new value propositions for the users. The first step is to do some research to understand your consumers, their hidden needs and their contexts of product use.
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, the guy moved gracefully, grinding coffee beans, pulling shots of espresso and steaming milk, and at the same time, conversing happily with his customers. The Baristas talked, laughed and enjoyed the moment with their customers who responded with equal enthusiasm.
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 they played and witnessed the difference in crowds that visited during different times of the day. In the morning, they were frequented by typical office goers. In the early afternoon, mothers with children and retired folks lingered around. In the evenings, they became a neighborhood gathering place.
Howard realized that these places offered comfort, community and a sense of extended family to the customers. Italians considered the 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 these observations, Howard realized that Starbucks’ connection to their customers had to go beyond just selling them coffee beans that they could take home, grind and make their own coffee. For sustainable growth, the connection had to happen in Starbucks’ stores. That was the most powerful, missing link Howard had been searching for. In Italy, drinking coffee was a social activity. Howard felt that though Starbucks was in the coffee business, it was overlooking its social aspect.
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 similar to what the Italian coffee bars and ‘espresso’ had been selling. He made the necessary changes in his stores and began to serve espresso drinks the Italian way.
Experience is in ‘Attention to Details’ -Howard carefully designed every store to enhance its quality and provide a multisensory experience to the customers including what they saw, touched, heard and tasted. He gave particular attention to ‘Aroma’ as it plays a vital role in the store experience. He made sure that the smell of brewing coffee alone was always lingering to welcome the consumers. He didn’t allow his associates to use perfumes as the beans could absorb the odor and that would take away from the smell of freshly brewed coffee. For similar reasons he also banned smoking. Besides, he made sure the food variety was limited so that the aroma of coffee in the store was maintained at all times. He trained Baristas on the art of making happy conversations with the customers and 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 caught Howard’s attention -the office going customers. These customers worked in the nearby office buildings and 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 to these office-goers. Change the context and the same customer wants a different job done.
Howard Schultz smelled a potential opportunity.
He and his employees set to work to improve the speed of delivery. They found ways to reduce time and improve efficiency at every step. One of the engineers Hap Hewitt invented a proprietary system for serving three kinds of drip coffee simultaneously, modelled after a beer tap. Baristas were trained to improve their speed. Slowly, the ‘speed of service’ pulled more people into the stores and became a massive competitive advantage for Starbucks.
Starbucks has been performing hundreds of activities to render the chosen value propositions to customers and constantly tweaks them to set new standards of excellence. Setting a long-term competitive edge depends on performing different activities from rivals or similar activities in different ways. Let us see how Starbucks did some of these activities differently than competitors.
Competitive Strategy is about choosing a different set of activities to deliver a unique mix of value-Michael Porter.
One of the core values of Starbucks is delivering authentic and high-quality coffee. The roasting process plays a vital part in providing quality coffee and the company particularly relies on ‘dark roast’ as it brings out the full flavour of coffee.
In the 1960s and 1970s, leading coffee brands were competing on price and 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 with an added advantage — only premium coffees like Arabica can be subjected to the dark roasting process. The robusta cannot be roasted as it gets burnt. On the contrary, Arabica beans can withstand heat.
Darker the beans are roasted, more brimful is the flavor, exquisite the aroma, and delicious the taste. Aroma and better taste helped to pull more consumers to the stores.
ROASTERS -Roasters were promoted within the company and trained for over a year. It was considered an honor to be chosen as ‘Roaster’. Professional roasters were trained to use smell, sight, and hearing to judge whether the beans had been roasted perfectly. The colours are tested through specially designed equipment. Even while the roasting process was on, a computer checked 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 was discarded.
Starbucks cared about quality and tailored its activities to deliver good quality fresh coffee and dark roasted flavour.
03b -CONSUMER EDUCATION
Despite serving authentic quality coffee coupled with an Italian style beverage experience, Starbucks would have remained a very small niche player or vanished from the market had it not invested in consumer education.
A brand has to build relationships in order to extend its loyal customer base. One way to go about this is to center the conversations around the customers and the experiences they can hope to achieve rather than focus on their own products and services. It is about what is best for the customer.
The original founders of Starbucks were passionate about their coffee and their mission was not only to earn profits but also educate customers about the joy of world-class coffee, roasting & brewing coffee and maximizing the quality of the coffee. They never aspired to build a business empire — they were more willing to spend hours with anyone who had a genuine interest in learning about the world’s greatest coffees. This attitude filtered down to Howard Schultz and other members of 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. The baristas were more focussed on building long-term relationships.
If you care about your customers, they would care about your product.
Howard was of the view that if they could offer something customers were not accustomed to and something far superior to what they had imagined, they wouldn’t accept the new product immediately on the basis of its superior quality — it would take time for them to develop a taste for the new beverage. And through education, they could motivate a sense of discovery and excitement to the new product, and in the course of time, satisfied and loyal customers for their product and 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.
03c -USER RESEARCH AS EVERY DAY ACTIVITY
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, the deeper we can view things from their perspective, and slowly and steadily, become like 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 great knowledge about coffee and were greatly passionate about it. They brewed their own coffee. They were passionate about their coffee and so they understood the frustration of not being able to access high-quality coffee, they could understand the pain of other gourmet coffee lovers.
Howard too was passionate about coffee. Like Jerry and Gordon, he thirsted for more knowledge about coffee. He learned about different coffees from different regions and developed taste palettes for different coffees. He also perfected the art of roasting different coffee beans, working as a Barista and perfecting each aspect of the coffee making and serving experience. He was not just a provider of coffee — he was his best user as well.
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 would very often visit his stores as a customer and observe others for hours. His observations translated into several successful ideas, opening up new ways to solve problems and support him in decision-making. Without sound research, Starbucks would not have been what it is now.
03d -HIRE RIGHT PEOPLE
A founder alone cannot build a sustainable brand. It is imperative they find colleagues who shared common interests’ and could bring different strengths to the table to take the company forward.
“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 be able to 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 maintaining the quality of coffee, thus, freeing up Howard to build the Starbucks brand. Dave joined Starbucks not for the money but for the Vision, Core Values and the team.
Starbucks’ quality begins with bean procurement and the company works directly with more than 3,00,000 coffee growers ensuring the quality and flavour of coffee beans. They never outsource the procurement process — rather 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 flavour, body, and acidity. They conduct “Cupping” tests to evaluate the aroma and taste.
Price -Starbucks buys only top quality coffee paying a premium above the commodity price.
Establishing Competitive Advantage -In the 1970s, most of the world’s coffee beans market was controlled by Europeans and Japanese. American Coffee brands, on the other hand, were not popular because they dealt in cheap coffee. Starbucks, therefore, had a tough time going against the tide and establishing trust.
The company meticulously worked on developing relationships with the countries from which it sourced the coffee beans. Dave Olsen, Procurement in-charge traveled widely and 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 while committing to buy the entire yield over a fixed period. This was mutually beneficial for both Starbucks and the sourcing countries.
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 is famous for its colourful and complex flavour. It is widely used in premium blends. Starbucks became the exclusive owner of these quality beans worldwide, thus, gaining for itself a massive competitive edge. The company convinced Columbia’s coffee growers about its determination to procure and serve only high-quality coffee. The brand invested in setting up a special operational structure in the tiny town of Pasto in collaboration with the locals for processing the ‘Narino’ beans.
Starbucks roasts the Narino Supremo beans to perfection and sells them to its customers without blending them with lower quality coffee. Thus, the brand is able to maintain its differentiation and 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. The company uses a demanding selection process to ensure its growers meet and adhere to these guidelines.
Starbucks owes its initial success to a unique strategic position involving clear trade-offs. Choosing a unique activity or differentiation is not enough to guarantee a sustainable competitive advantage as competing brands can 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, divert them from their chosen path.
AUTHENTIC QUALITY -Initially, to combat price war, Maxwell coffee house added a tiny amount of robusta beans to their existing coffee blend made from Arabica beans. Sensory tests showed that customers could not make out the difference. As time passed, consistent pressure for 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 its unique position in the market. On the other hand, Starbucks from the very beginning made sure never to compromise on the quality of the product. Even when the price of Arabica beans was on the rise Starbucks refrained from the temptation of adding Arabica beans to robusta beans to cut down costs and thus compromise on the quality of the products.
ADDING FLAVOUR -In the late 1990s, there was a demand for artificially flavoured coffee beans. Competitor brands, in order to please the customer, took to adding artificial flavours in the roasting process. Again, Howard refrained from following suit as the practice was incompatible with one of the Starbucks’ core values — maintaining 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 took this route, fearing the risk of losing control over the quality of his product. He looked at franchisees as middlemen standing between Starbucks and its 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. This ensured consistent quality of coffee in every store, and thus, provided a consistent experience in every store. Companies that franchised too early and too widely lost control over quality. Some of Starbucks’ competitors did grow through franchising but were never able to develop 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 and triple their volume of sales. But Howard refused to entertain the idea of pouring 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 ended up confusing their customers. Starbucks’ reputation grew. Through this trade-off, Starbucks conveyed to their employees more effectively than words on how seriously they were committed to the brand’s core values. This also helped the company build a strong internal brand culture.
Starbucks, by not following in its competitors’ footsteps managed to project a consistent image of credibility and build a sustainable competitive advantage.
05 INTERNAL BRAND CULTURE
PEOPLE FIRST, PROFITS LAST -One of the main reasons why Starbucks consistently outperformed competition was the dedication of its employees.
Employees are responsible for breakthrough customer experiences and they themselves 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 behaviour with customers reflected Starbucks’ values and aspirations. Baristas needed 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 Walmart, Howard wanted to share the ownership of the company and the rewards of financial success with his employees. He introduced the concept of ‘Bean-Stock’ and offered them stock options. He paid more than the going wage in restaurants and other retail stores and generous health-care benefits. These benefits were also extended to part-time workers. He felt 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. It is little wonder then Starbucks has a lower attrition rate than the other players in the industry.
Howard also believed that the best way to achieve loyalty and goodwill of the employees is to treat them like family. A sense of belonging would help them put their best foot forward and this would not only help achieve better performance but also cut costs of training and recruiting.
If the company treats its associates well, they will, in turn, treat the customers well, thus ensuring their repeat visit and also positive word of mouth references. Real profits in business lie in ‘repeat customers.’
TRANSPARENCY -Howard and his management team were honest with their employees. They shared every piece of information, be it expansion plans, profit details, inventory, purchases or sales figures. This 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 the brand’s mission statement. Though Howard was a bit worried about giving an opportunity to his employees to monitor the top management, he realized it would go a long way to show his employees that he was fully committed to the brand’s core values. This was his way to show the sincerity of management towards the mission statement. So he implemented the idea and this helped the company maintain higher standards and also provide an important avenue for open communication 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 to ensure that his partners had enough bandwidth to 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 of the customers wanted Starbucks to offer non-fat(skimmed) milk for reasons of health. But Howard Schultz and the other top leadership rejected the idea, sticking adamantly to the Starbucks’ core values. Howard, on his part, 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 the store baristas opposed Howard Behar, pointing out the operational difficulties in handling two types of milk. But Behar went ahead and tried this out without anyone’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 had begun to offer nonfat milk.
It would be tough for a brand to maintain a 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 they not only complemented but reinforced one another forming a chain link and, thus, building a 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 also enhance differentiation and amplify trade-offs.
The more the activities are different from rivals and reinforce each other, the more sustainable is a competitive advantage. What are these reinforcing activities in the context of Starbucks?
06a -HIRING PEOPLE SMARTER THAN YOU
One of the reasons why good brands fail to become great brands is that they are afraid to hire people who are far more experienced, knowledgeable and have better leadership skills than the founders. Even if they hire these people, they fail 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 have shown results in particular expertise and who can share the brand values can make all the difference.
Howard Schultz was not insecure and he went on to hire experienced people who were strong-willed, self-reliant & confident, were not cowed down by him, and had tasted success.
- In the late 1980s, competitors were fast catching up with 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 he 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 simultaneously. He helped Starbucks to expand rapidly and establish a strong competitive advantage.
- As Starbucks was expanding rapidly, the organization was also growing and becoming more complex. Management rules meant for a small company was no longer applicable. The company could collapse altogether. What did Howard do? He hired Orin Smith who had broad experience in 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 power but finally went ahead and handed them the authority for the benefit of the company and its customers. Today, he concedes that if he had not given them the authority and power, 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 the 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 logo were being copied by new entrants and existing players and this 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 the competition was not to fight his competitors on the same features or elements but to 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 this would impede our success.
Focusing on current customers will break the existing market into finer segments, forcing us to tailor the offerings and reduce the market further. To break away from this, the first step is to shift your focus from “Customers” to “Non-Customers” — 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 was some demand for a type of blended coffee beverage among non-customers. The team experimented by adding and mixing various constituents and arrived at a drink of a particular combination. They launched the beverage in a couple of stores, tweaked it according to feedback. The consumers loved the drink. Then they launched the blend nationwide in the year 1995. Starbucks’ team expected to sell around 1,00,000 drinks in the first week but managed to sell 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, thus, filling the stores in the afternoons and during warm weather when the coffee business was typically slow. Starbucks was no longer reliant on the holiday season.
After seeing the sales, Howard Schultz came up with a new idea — bottled Frappuccino in collaboration with Pepsi. By the summer of 1996, Starbucks® bottled Frappuccino® chilled coffee drinks had found their way 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 flavour 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 to grow the coffee market. The company was able to attract more non-customers. The brand could now fight against non-consumption.
Starbucks began adding coffee extract in a wide range of products including coffee-flavoured beer, coffee ice cream, and ready-to-drink bottled beverages.
For ice cream coffee, Starbucks partnered with Grand Ice Cream who had a nationwide distribution network. Starbucks became the number one premium coffee ice-cream brand in the United States with very little promotional expenses. New products showed that Starbucks was dedicated to innovation. Howard and his team thus, successfully 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 build a massive competitive advantage.
06c -FLAVOR PACKS
The competing brands in the specialty coffee business felt that it would be impossible to expand their 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 was that the beans would lose their freshness and flavour if they were shipped to stores located thousands of miles away.
Howard Schultz and his team focussed on getting around this problem. 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. And with this, 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.
Flavour packs made the rapid Starbucks expansion strategy practicable and achievable.
06d -OPINION LEADERS
Starbucks was on an expansion spree but at the same time focussed on making each new store it opened profitably. 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 the community who have the ability to influence the behavior of other individuals in the desired way. They have better exposure, sound knowledge in a particular domain, are 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 at 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 had recently moved away from Seattle. They were passionate about coffee and had a sound knowledge of the sources of coffee beans. They knew how to roast and brew and were the real connoisseurs. They were affluent, highly educated, well-traveled, technologically savvy and greatly interested in arts. They also had a massive inter-personal network and their behaviors greatly imitated by their fans.
Starbucks loved interacting with these people due to their shared interests. In the year 1990, Starbucks invested in a small dedicated phone and computer system to support this customer base. Mail-Order customers had become very loyal to the brand.
Before Starbucks expanded nationwide, these ‘opinion-leaders’ were already spreading awareness about the company among their network. It made sense for Howard to leverage this customer base. He began to open stores in cities and neighbourhoods where these loyal customers were clustered. Every opinion leader was invited for the opening of the stores located within their neighbourhood. 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 neighbourhood and attracting people’s attention.
06e -REAL ESTATE STRATEGY
For a retailer, choosing the right site is a critical part of a sustainable competitive advantage. The right location would help in increasing brand awareness.
Hiring -When hiring people, Howard not only focussed on their technical qualifications but their passion and commitment to their core values while handling real estate projects.
LOCATION -Starbucks opened stores in highly visible locations, downtown office buildings or in densely populated urban or suburban neighbourhoods, near supermarkets. Though choosing a site was a time-consuming process, Howard and his team were willing to spend both time and money in the right location. And they got it right most of the time — of the first 1000 stores that the company opened, they just had to close two. Not many could boast such a record. Many 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 the real estate strategy by adopting the ‘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 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 Walmart, Starbucks clustered their stores in important locations with the intention of increasing brand awareness & market share and ultimately saturating the market. Howard saw that the potential benefits of store clusters outweighed their drawbacks. These clusters helped to manage store traffic and maintain speedy service. Howard Schultz hated to lose customers due to late service. The saturated market at important locations further deterred competitors from entering the market.
‘Espresso Experience’ and music have played a pivotal role in Starbucks' stores for over forty years. The company was a pioneer in integrating music into the retail environment.
Starbucks went the extra mile to choose a piece of interesting, cool music that customers heard rarely but which added to their experience at the stores. 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 from.
Starbucks also gave new artists a larger stage to share their talent and the brand benefitted from enhanced brand awareness and increased sales.
Starbucks wanted to be more than just a coffee brand and music helped to define it as a lifestyle brand.
06g -HELPING FARMERS
Starbucks had long realized that the success of the brand was intrinsically linked to the thousands of farmers who grew their coffee. The company had been investing in improving the farmer’s life to ensure a long-term supply of good quality coffee.
FINANCIAL SUPPORT -Traditionally, small coffee farmers were dependent on a single payment made by the companies at the end of the harvest season. But they needed money throughout the season to cover personal and farm-related expenses. At the end of the season, when climatic changes affected the whole coffee crop, it wreaked havoc in their lives. To help them overcome those problems, Starbucks provided them short and medium-term loans and encouraged them to invest in upgrading the infrastructure.
INFORMATION & TRAINING SUPPORT -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 and trained them to adopt new techniques.
The company also taught them ‘Ethical Coffee Farming’ methods and sustainable practices. Every year, the company donates millions of disease-resistant trees to help farmers fight threats like ‘coffee leaf rust’. This helps them improve the quality and the yield of coffee beans which in-turn improves the company’s profitability.
Community Support -Starbucks also provides leadership training and opportunities to the farmers, particularly women. They also provide funds and support for children’s education, clean water, and sanitation in these 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, it managed to gain the first mover advantage.
Starbucks’ direct interaction with growers, along with their sourcing and social responsibility standards, made suppliers feel they were an integral part of Starbucks’ corporation. Its community level involvement further helped to strengthen their loyalty. This, in turn, set a high entry barrier for a potential competitor to source good quality premium beans on a large scale.
BARGAINING POWERS OF SUPPLIERS -Most of the premium Arabica coffee growers were poor farmers who own small-sized farms. They did 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, thus putting the growers in a vulnerable state. These farmers, therefore, wanted a long-term association with a vendor who could understand their situations and work with them. They thus became 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, improved performances, creates a high-quality coffee product and offers flexibility for future requirements. The plant is designed by a team of experienced professionals from multiple fields and they took 3–5 years to design the final product.
- Unlike its competitors, Starbucks uses a proprietary extraction process as the best beans need advanced technology.
- The company has also developed a proprietary process to remove bitter and acidic flavours, while preserving the rich and robust ones.
- Once the beans reach the roasting facility, the systems are so 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 AND 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 the 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 on 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 weather was cold for most of the time. Unfortunately, the sales were very slow. But by 1990, after three years, the sales began to soar. The customers developed a taste for coffee. Many switched from drip coffee to Cappuccinos, Cafe lattes, and roasted coffee.
What happened here? -It took more than three years to reach a critical mass and idea to 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 depends 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 already patronize the company.
As the number of consumers increased, the perceived value of Starbucks’ service increased. It prompted more non-consumers to try the product and improved 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 users, the more the data, the more the user experience, the more the right recommendations. Network Effects discourage potential competitors.
09 SUPPLY CHAIN MANAGEMENT
A well-built and run supply chain is the one that 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 sourcing the coffee beans to serving the cup of coffee to consumers.
THE SOURCE -Starbucks never outsourced the procurement process in order to retain complete control over the quality of coffee beans. The brand’s relationship and community building initiatives followed up with 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, they are sent to roasting facilities, located in a region where the product is sold. This has 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. The company’s sales volume allows 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 exactly the same way at each facility.
After roasting and packaging, the beans are sent to large regional distribution centres (DCs) or small warehouses called Central Distribution Centers(CDCs). From here, the beans and other items are sent to local stores like the ‘Hub and Spoke’ model.
THE OPERATIONAL EFFICIENCY -Starbucks owns and controls some of the distribution centres while others are operated by a private partner. There’s a strong vetting process to choose the vendor. The productivity and contract rates are 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 analyzes the supply chain’s transportation costs by region and by the consumer. This allows them to retain only the most efficient and cost-effective transportation vendor. Dedicated truck fleets ensure on-time deliveries.
REPLENISHMENT SYSTEM -Starbucks also uses an automated information system to monitor demand, inventory, capacity, and scheduling in real-time. This allows the company 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 predict demand and adjust their expansion strategy accordingly.
SECURITY -As the supply chain’s complexity increased, Starbucks introduced the “Enterprise Security Platform” to monitor critical facilities and operations at the retail outlets.
Many of the company’s competitors failed to grow because they did not invest in the right people, the right systems and the right processes.
Note: The above content is part of the following book.
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We could cover only limited activities in this article. Starbucks considered every activity from the customer’s perspective. Thus, each activity was customer-centered and this is what made the brand so distinctive and gave it a competitive edge. The company was well-oiled machinery and a competitor copying only a few spokes but not the underlying structure would find it difficult to run the business so seamlessly and so flawlessly like Starbucks.
One of the greatest advantages of the company was its founder, Mr.Howard Schultz. His strong leadership played a decisive role in taking the company to dizzying heights. He was curious by nature and always ready to learn and experiment. He worked as a Barista to understand their underlying mannerisms and the way they interacted with the customer. He had a great sense of observation and ability to extract valuable insights, which held him in good stead. He followed a disciplined approach, was not hesitant to share power and authority and determined that each activity was in sync with the company’s core values. He didn’t compromise on the quality of his products or the vision of his company. His ability to withstand pressure added to his stature. So even if by any slim chance a competitor managed to replicate his business processes where would they find a person of his stature?
References: Pour Your Heart Into It by Howard Schultz, Articles from Ohio State University website, Article in Supplychainquarterly.com by James A Cooke, Article in Foodengineeringmag.com by Wayne Labs, Strategic Management-An Integrated Approach by Charles W.L. Hill, Gareth R. Jones, Starbucks-A Strategy Analysis by Ryan C Larson, What Is Strategy-HBR article by Michael Porter, The Five Forces Of Competitive Strategy-HBR article by Michael Porter,What Great Brands Do by Denise Lee, Good To Great by Jim Collins, Sam Walton’s Made in America, Diffusion Of Innovation by Rogers Everett, Crossing the Chasm by Geoffrey Moore, Blue Ocean Strategy by W Chan Kim.