Starbucks's Organizational Structure
A decentralized, cross-functionally driven structure led by one leader is a brief summary of the Starbucks' structure today.
However, there is a lot to be said about that one leader.
Schultz had his own leadership style that may be criticized positively or negatively. His Excellent values delivered on
- Commitment to the organization's vision
- On the ground support from top management
- Empowering the corporate culture
- Non-dictatorship approach
All these values have a seamless fit with a 'good leader's' character.
Starbucks's External Operating Strategy - "Slowly But Surely"
Starbucks has professed a strict slow-growth policy. Avoided franchising as a strategic alternative to growth, except in airports with license agreements and managed to maintain total ownership policy of all retail outlets during the growth era.
The strategy laid out is simple:
- Starbucks ventures into a new market
- Dominates it first
- Before moving further to new potential markets
By doing that, Schultz, avoids spreading his resources too thin and manages to maintain control on the business in a 'hands on' fashion.
U.S. Category analysis & trends
The US market is a Mature one in overall consumption. Some of the key findings are important indicators to the competitiveness of the industry:
- Soft drinks dominate the largest share of segment
- Coffee follows in second position on a decline
- Tea seen as an alternative to other types of beverages, yet stagnant
U.S. Coffee industry findings
- Decline in coffee consumption attributed to health related consumer trends
-
Decaffeinated coffee has not increased due to taste perceptions - high compromise
- Instant coffee market affected due to high demand on 'better-tasting coffee'
- Instant coffee sales dropped by 12% in 1992
Historical findings and trends of the US Coffee market:
- Consumption peaked in 1962 to an average of 3.1 cups of coffee / day
- From 1960 – 1980; coffee consumption suffered a long and steady decline ending with an average of 1.8 cups / day
- Since the early 1980s, demand has been stagnant with growth only occurring in the specialty coffees
Gourmet Coffee Industry Findings
While the regular coffee market in the US has been stagnant and more so on a decline, the Gourmet coffee sector was growing. Industry finding show the following:
- Sales of premium coffee has been building on an annual average of 13% since 1985
- Gourmet coffee increased its sales in retail by 19% in 1994
- Gourmet coffee sales increased fivefold since 1983 (to date)
- Gourmet coffee expected to triple its growth by 2000 at the expense of commercial brands as consumers go upscale
- The explosive growth in gourmet coffee is attributed to the poor economy
The reason for this phenomenon is simple and contradictory in nature:
- While people are scaling back, they still need their 'minor indulgences'
- While they cannot afford a luxury car, they can still afford a luxury coffee
Which meant that this niche not only existed but was also driving business for retail coffee businesses, such as Starbucks.
Competitive Scene
The competitive scene is slightly fragmented. The fragmentation arises from internal beliefs;
"We don't believe that canned coffee competes with Starbucks's products…" says H. Schultz.
Also the competition differs when looking at a national or a regional scale.
Key competitive coffee retail outlets:
- Peet's coffee and tea [16 stores in California]
- Wholly owned subsidiaries, slow expansion and West Coast focused
- Barney's coffee and tea [86 stores in seventeen states]
- Mainly in malls with a strong emphasis on Florida and Atlanta, take-away
- Gloria Jeans coffees and teas [194 stores in over 100 cities]
- Take-away in malls, mostly franchises
- Seatle's best coffee [264 stores in 64 cities]
- Mostly franchises, followers to Starbucks, low investors
Market Share Analysis
- High fluctuation levels among competitors
- Lack of a clear growth trend
- Starbucks three year dip between '86 & '89 post management take-over
- Clear and steady growth for Starbucks post 1990
-
While MS seems low, net sales grew from nearly USD 50M in 1990 to over USD 450M in 1995
S.W.O.T. Analysis
Internal Strengths
- Strong corporate culture as seen from the employees treatment and the organizational structure
- A darling for stock investors due to the continuous growth
- Low investment, steady growth – Schultz growth strategy
- Total ownership status, security
- High brand values and equity
- Employee selection and motivation
- Quality product
- Customer education through Starbucks
Organization's Weaknesses
- Unclear organizational structure (cross-functional and decentralized)
- Lack of product diversity
- High operating costs
- Inflexible management
- Total ownership (limits growth)
- Lack of trade channel diversity
- Marketing support non-existent
- Monopolistic management – one man show
External Opportunities
- New markets offer a potential for expansion (ex; Asia Pacific)
- Product diversification to avoid stagnation
- Trade diversification to allow for demand creation
- Accessories market is a diversified approach to increase retail traffic
External Threats
- Health conscious consumers are limiting growth
- Increase in coffee cost and decrease in coffee farmers due to profit margins shrinkage
- New and existing competitors
- Quality control franticness deprives growth if not controlled with moderation
Applied Strategy Criticized
If we look at Starbucks's applied strategy, this clearly stems directly out of their mission statement as seen earlier in this report. If we were to look at every point listed in that statement and based on the analysis done do far criticise the achievements:
- Great work environment leads to better consumer interface is something that Schultz believes in and has achieved
- Diversity, however, lacks in product and trade related areas as seen in the Internal weaknesses section analysis
- Highest standards of quality have so far implied a slower expansion and response timeline. This is even more true when combined with the Schultz growth strategy
- Satisfied customers has initiated positive word-of-mouth and better customer responsiveness, which in turn has meant that the need for marketing support and trade diversification is minimal
- Community services contribution has led to social acceptance of retail outlets during expansions, and has built a positive reputation for Starbucks
- Profitability is a non-issue; "… not to sacrifice long-term integrity and values for short-term profits" and Starbucks is known to be the darling for stock-investors.
Driving Success Further
The rosy picture drawn for Starbucks needs to be maintained. We have seen threats and weaknesses that if not fixed might turn this rosy picture to a not so very rosy one.
The findings to recap are simple:
- US market is stagnating - closing to a mature market; growth is limited to existing market share competition – market consolidation
- Europe is a very educated coffee market; hence Starbucks's strategy of educating consumers becomes obsolete in such a market where entry barriers are high and hence taking Europe out of the potential markets for short term plans
- Coffee farmers are decreasing in number, due to lower profit margins, while Starbucks is helping these farmers, the cost is too high to maintain expecially when cost economies and advantages become key competitive advantages
- Health conscious consumers are increasing in number and affecting bottom line sales
- Analysts believe that the coffee-bar market may be reaching saturation although the Gourmet sector is growing
- There have been some consolidations as bigger players snap up some of the smaller ones
-
Stock ratings where downgraded from 'buy' to 'attractive' pointing to a slowing growth in sales and negative sign
- Starbucks's store base is also maturing in the US, leading to a slowdown in the growth of unit volume and profitability
All these symptoms bundled together mean . . . Starbucks needs to expand globally in order to maintain their growth rates and profit figures long term.
Strategic Alternatives For Global Expansion
In order to expand globally, we have identified the following strategic expansion alternatives to be considered in light of the findings so far.
- Franchising and trademark exportation strategy:
Growth and expansion through selling out the corporate entity geographically to solicitors
Acquiring existing set-ups for potential renaming
- Majority Joint Venture Strategy:
Gives room for product diversification through expansion
- Slow penetration strategy:
Maintaining existing mode of entry; slowly but surely; and total ownership
Evaluating the Modes of Entry
I- Franchising and trademark exportation
Pros
- Lower financial burden
- Lower market entry risks
- Fast growth / expansion
- Increase in marketing support
- Decentralized management
Cons
- Management control
- Relative quality levels
- Indifferences
- Potential trademark competition
- Non-existent learning curve (cost economies)
- Lack of global strategic coordination - the use of generated profit to support other market operations
II- Acquisition Strategy
Pros
Fast growth / expansion
Easy
Faster learning curves
Use of existing resources and capabilities
Low internal development cost (training, experience…)
Clear financial records (access to existing company's success record)
Cons
Corporate culture clash
Overestimation of economic benefits
Expensive mode of entry
Potential screening problems with acquired company
Internal power disputes
Employee insecurities
III- Majority Joint Venture
Pros
Risk and cost sharing
A means to potentially succeed (if venture company is capable of adding value)
Faster growth
Political acceptability
Tighter control by the dominant partner
Benefit from local partner's knowledge
Cons
Profit sharing with new business partner
Sharing of 'acquired know-how'
Lack of global strategic coordination
Lack of economies of scale
IV- Slow penetration
Pros
Global strategic coordination
Economies of scale
Management control
Quality control
Export of know-how
Total ownership
Cons
High costs and risk
Slow progress (in a non-liquid organization)
High entry costs (experience, set-up . . .)
The Need For Change
Before we recommend on the strategic alternatives, we need to assess if there is a need for change in the first place.
- There is a clear gap that sets the difference between the desired growth objectives and the actual performance of Starbucks as we have seen from the stagnating store returns.
- There are clear opportunities in new markets
- Consumers attitudes and perceptions to towards coffee is changing
Starbucks's Expansion Objectives
- To maintain the growth rate achieved in the 90s avoiding U.S. market saturation by expanding borders
- Diversify their product offering to attract health conscious consumers and new entrants
- Maintain the existing quality levels without affecting the speed of growth and the manuverability
- Maintain existing corporate culture
- Achieve profit rates expected by shareholders
- Achieve product differentiation in line with demand – customization is key
Obstacles For Change
Only one obstacle for change has been is identified in this scenario - 'organizational structure' would need to be re-defined and re-set at
- Currently Starbucks operates on a functional structure (cross-functional integrations)
- Which is also decentralized
Implementing Change
In Starbucks's case, it is easy to implement this change, since change itself has been recognized by top management as a need to grow. This means that there are potentially no organizational politics expected to stem out of this change:
Top down change; driven by the C.E.O. (Schultz)
Recommendation
Out recommendation based on the findings are majority joint ventures as an expansion strategy; this will allow Starbucks to achieve their main objectives by:
- Maintaining control
- Benefiting from their local partner's knowledge
- Growing faster
- Sharing the risk and cost with their newly identified partner
- Diversifying the product offering via venturing with non-coffee retail shops (tea, cigar, internet cafes, …) based on local responsiveness
And will only require Starbucks to:
- Share the profit generated for the venture agreement
- Share their know-how
Strategy Implementation
I- Designing the Organizational Structure
Starbucks recommended organizational structure is a Matrix Structure that keeps in line with the existing decentralized structure, however, redefines areas of responsibilities and reporting lines
Starbucks's matrix structure
The above structure assumes the following operational duty-lines:
- Area managers report into top management on business and performance related issues
- Area managers will acquire the required support from the Functional Level and Product based managers
II- Matching this new Structure and Control to the Strategy
Starbucks is venturing with a company with similar or related businesses, hence integrating them into its corporate structure should be fairly easy.
Since implementing a strategy through organizational structure and control is expensive, Starbucks will need to monitor and constantly oversee their structure in order to economize on bureaucratic costs as seen in the their weaknesses section.
At the functional level, each function will require its own kind of structure and control system to achieve its functional objectives
Setting Organizational Control System
In order to monitor and measure the effectiveness of the recommended strategy, Schultz will have to set measures that are relative and in line with his concerns or objectives. In this case, we recommend two financial control measures:
- Stock price: In line with the need to remain the darling of stock-investors
- Return on Investment: This is important since as we've seen, Starbucks is not a very cash-rich organization and their previous policy for expansion has been slow with low investment levels.
This route will require the following controls to control the above financial control measures:
- Output controls: Relative to the different divisions in the organization. In this case, the functional division and the product based division. Both of which will have to set their goals
- Budgets have to be set and agreed in advance to ensure that effective spend and returns are being monitored and forecasted in advance and avoid any surprises at year end
These control systems put in place to match the strategy recommended by us to Schultz, imply a very safe approach.
- Starbucks will be able to control and manage the change as well as measure the effectiveness of this change
- Learn and apply these learnings (or modify) based on learning as they grow
- All this while minimizing risk and cost
Evaluation Of Structure
With a decentralized, matrix structure and the fact that Starbucks's employees are used to cooperative cross-functional relationships
- Less potential for conflict between functions or divisions
- Starbucks will achieve more flexibility than they would have in highly controlled functional structures
"We are a coffee company, and that's what we're going to stay, though there are different ways of being in coffee."
Thank You
Nibal A. Slim & Eddie M. Maalouf
