Ethical and Strategic Issues in Management: Starbucks

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A persistent problem organizations face is the effective management of their relationship with the variety of external agencies and audiences that impact their business, from the general public to specific stakeholders and pressure groups (De Blasio, 2006).  In addition to the 25 million coffee farmers who depend upon coffee as their primary source of income, coffee contributes significantly to foreign exchange earnings, and plays a leading role in determining opportunities for employment and infrastructure development in more than 50 developing countries (IISD, 2011).  Starbucks describe their corporation as being socially responsible by “conducting their business in ways that produce social, environmental and economic benefits to the communities in which they operate.”  This is evidence of the triple bottom line agenda which focuses corporations “not just on the economic value they add, but also on the environmental and social value that they add – or destroy” (Elkington, 2004).  This report will detail the manner in which Starbucks reduce the negative externalities of coffee production to remain sustainable in a market in which stakeholders demand corporations to conduct their business with strong ethical consideration and a consistent commitment to publically stated corporate values.

1.0 Analysis of Industry

1.1 Industry Overview

Despite the economic downturn and its impact on consumer spending the UK coffee industry has continued to prosper.  In 2010, the market grew by more than 12% compared with 2009 (Thompson, 2010) and the industry remains on track to reach £2 billion in consumer spending by 2012(Weston, 2009).  Coffee industry players, consumers, and activists have underscored the role coffee plays in both the environmental and economic status of producing countries and have voiced a desire to change the system.  This has led to the adoption of ethically friendly products in coffee shops, with fair trade products continuing to increase their share in the market reflecting the growing ethical awareness of consumers.

1.1 Market Share

The market is dominated by three main players; Costa, Starbucks and Caffe Nero.  Costa is marginally the largest operator of coffee shops owning 27% of outlets in comparison to Starbucks 25% as can be seen in Fig 1. 

Fig. 1 Leading operators in the UK coffee market measured by % of outlets (Mintel, 2009)

However, Fig. 2 demonstrates Starbucks dominance in the market, turning over considerably larger annual revenue than their competitors reflecting larger sales per outlet.

Fig 2. Financial Indicators of the Market Leaders 07-08 (Mintel, 2009)

1.3 Ethical and Sustainability Issues

The marketing of ethical products proposes that they are of a higher quality and suggest that they are worth the premium price attached to them, allowing consumers to “more easily justify spending the extra money because it is a purchase they can feel good about” (Mintel, 2009).  As Fair-trade continues to become more established within the coffee industry (Fig.3), retailers need to find more innovative ways to attract ethical consumers and differentiate themselves from their competitors.

Fig. 3 Sales of Fair-trade hot beverages in the UK, 2003-07 (Mintel, 2009)

2.0 Economic Sustainability

Economic sustainability is most commonly interpreted as a “condition of non-declining economic welfare projected indefinitely into the future” (Pezzey, 1992).  The rationale behind this idea is that the “flow of economic benefit of natural assets should be preserved because it should be shared between the current and future generations” (Schrattenholzer, 2004).  Starbucks is the “undisputed leader in the specialty coffee industry by buying only the best quality coffee and providing an unmatched store experience” (Dartmouth, 2002). However to maintain this market dominance an effective strategy must be consistently pursued.  Three frameworks have been used to further explain Starbucks strategy; “PESTEL analysis” which covers the external factors affecting the market, “Market segmentation” which describes the different demographic segments Starbucks service and “SWOT analysis” which highlights the internal and external factors affecting Starbucks.

Starbucks ensure their short term actions are consistent with their long term strategies of being market leader.  In 2009, Starbucks reported a 77% quarterly drop in profit.  To counter this they lowered the price of their more basic drinks to cope with the economic recession which drastically reduced consumer demand and spending (Crane and Matten, 2010).  Within the next year Starbucks plan to add 500 new outlets to their worldwide chain of coffee shops to reach a total of circa 17,500 coffee shops over the next financial year (Thompson, 2010).  400 of these outlets are being built outside their main USA market and as part of their international expansion programme.  This programme has however been impacted by the political status of the new market, as for example in the case highlighted in Fig.5 where Starbucks were forced to close down their stores in Israel.

In the long term, Starbucks aim to maintain their ethical stance by continuing their efforts to support fair-trade and being open in their business operations.  Starbucks Corporate Social Responsibility (CSR) reports are readily available online and Starbucks openness in doing so helps to maintain customer trust for its products and services (Crane and Matten, 2010).  As expressed in Fig 4, the strength of Starbucks internal operations earnt them the accolade of the ‘Most Ethical Company’ in the Europe coffee industry as judged by Allegra Strategies in 2009 (Starbucks Newsroom, 2010).  To my mind, the policies and actions of a company if made  open to public scrutiny can reinforce perceptions of legitimacy among the public.

After successful expansion in China, Starbucks are poised to exploit the market opportunity addressed in Fig. 4 and continue to venture into the Asian market.  A non-binding memorandum of understanding was signed with Tata Coffee for the sourcing of coffee beans and roasting facilities relating to Starbucks entering retail operations in India (Financial Express, 2011).  Furthermore, Starbucks plan to develop products aimed at penetrating new demographic areas.  As can be seen in Fig. 6 Starbucks target a range of customer profiles, and is intent on targeting every consumer who drinks coffee and not just the high-end customers.  They have introduced chocolate chip cookies and toffee almond bars to further target children and have entered the hot food market by selling hot breakfast items and toasted sandwiches.  Starbucks also use co-branding with supermarket chains such as Sainsbury’s to leverage the assets of its brands and expand further into markets.

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These strategies are mostly concerned with expanding its market share and in doing so making their presence as an international corporation more stable.  Starbucks has categorically set its short and long term strategies to remain economically sustainable and if implemented effectively will ensure they remain a leader in the coffee industry through future generations.

Fig.4 SWOT Analysis

Fig.5 PESTEL Analysis

Fig.6 Market segmentation – Customer Profiles

3.0 Environmental Sustainability

Environmental sustainability can be defined as the maintenance of important environmental functions into the indefinite future (Ekins, ...

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