Ethical and Strategic Issues in Management: Starbucks

by goldenbear (student)

University Degree Business and Administrative studies

Introduction

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.

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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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, 2000). Increased productivity in the production of coffee has adversely impacted the natural environment as is the case in Ethiopia where coffee production has been identified as a substantial cause of deforestation. Originally 34% of the country was covered by natural forest, but by 1989 this had declined to 2.7% (Rogers, 1992).

Starbucks highlight their environmental focus areas as:

Ethical sourcing
Environmental stewardship
Community involvement

However the main environmental issues facing Starbucks are:

Sourcing issues
Recycling – Both in-store/out of store

A SWOT Matrix for choice of an environmental strategy (Fig.7) has been used to express the issues faced by the industry and how Starbucks have addressed them. In the case of ethical sourcing, Starbucks have excelled at setting a reputation as one of the industry’s corporate social responsibility leaders. Currently all espresso products are fair-trade certified and Starbucks are set to meet their self-imposed target of all products sold, being 100% Fair-trade by 2015. The increase in productivity of the production of coffee has caused damage to the working environment. The use of synthetic chemicals associated with some production systems pose direct health and safety risks for coffee workers and the environment around them (Market-trade fair,2011). However the influence of fair-trade has also resulted in improvements to this process. Shaded plantations help in protecting the workers by reducing pathogen infection and also the environment by increasing the number of pollinators resulting in better harvests for fruits. When processing coffee Starbucks have actively tried to cut down on water use and by 2009 had cut its water use by 4.1%, keeping pace with its 2015 goal of trimming water consumption by 25% (Green Investing, 2010). However in the case of recycling, Starbucks performance is less than stellar and their reputation has been damaged by negative press. Within their outlets non-recyclable items are still being sold. For example, Starbucks ethos water is marketed to help children get clean water and their donation scheme has resulted in contributing more than $6 million to water-stressed countries yet the plastic bottles they are sold in are non-recyclable. By putting at least 10% of recycled plastic into the bottles they would match their competitors who are more actively selling recyclable items. In a recent statement Starbucks commented that they “get more customer comments about recycling than any other environmental issue – especially when it comes to our cups” (Starbucks, 2011). In recognition of this opportunity a proposition was made in 2010 to increase their recycling measures but only 11% of Starbucks shareholders voted in favour of increasing the company’s stance on recycling (Roberts, 2010).

Regardless, Starbucks realised a need for change and enforced an innovative strategy to increase their stance on recycling. This is expressed in a basic corporate environment strategy (Fig.8) and details the realisations of the benefit of marketing environmentally differentiated products. Amidst pressure from consumers and shareholders, Starbucks have both showed support for recycling movements as well as found innovative solutions to combat negative public attention.

Fig. 7 SWOT Matrix for choice of an environmental management strategy

Fig. 8 Adaption of Basic Corporate Environmental Strategies – Matrix (Schaltegger ,2003)

4.0 Social Sustainability

Stren and Polese (2000) define social sustainability as “policies and institutions that have the overall effect of integrating diverse groups and cultural practices in a just and equitable fashion”. Arguably, the greatest threat to the social sustainability of coffee production results from the economic conditions facing coffee producers (IISD, 2011). Farmers depend upon coffee as their source of income and as a result declining coffee prices can have a direct impact on important aspects of life such as education and medical services. Moreover, it is suggested that the performance of the market is transmitted to workers through general working conditions and wages. In a recent survey of coffee plantations in Guatemala, it was found that none paid the country’s minimum wage and that a majority of them did not even pay half the minimum wage (IISD, 2011). As well as exploitive wages, child labour is reported to be widely used in growing countries. In the plantations of Kenya 50-60% of the workers during coffee pickings peak season were children (Johnson, 2006).

Within Starbucks CSR reports (Starbucks, 2011), the ways in which the company are working with farmers and coffee-growing communities are expressed as;

Supporting with small-scale farms and who grow Fair Trade coffee
Paying commands
Buying
Helping conserve wildlife and biodiversity in Africa's coffee regions through the (AWF)
Investing in a better future for farmers through
Involving our partners and customers in our work with coffee farmers in Costa Rica with (additional information can be found on their website: )

Starbucks involvement in the welfare of coffee-growing communities can be expressed in a CSR pyramid.

Fig. 9 Adaption of CSR Pyramid for Starbucks’s approach to coffee farmers (Carroll, 2001)

This pyramid represents obligations that exist for a corporation and the significance of these responsibilities. Through fair-trade Starbucks help to create jobs, establish local business linkages and invest in staff and technology development. Starbucks help to improve the quality of life through loan programs and proving farms, and by paying the high prices that quality coffee demands Starbucks demonstrate their commitment to operating fairly. Legal responsibilities are relatively less important in the pursuit of CSR; however through the advertisement of the conditions in farming countries have strengthened the human rights aspect of legalisation.

Furthermore, Starbucks recognise farmers as Starbucks key stakeholders who “can affect the achievement of the organisations objectives” (Freeman, 1984). Using the descriptive stakeholder theory which “ascertain how corporations actually do take into account stakeholder interests” (Crane and Matten, 2004) we can see how Starbucks deal with the social issues facing them. Commitments schemes such as the CAFÉ Practices Program which “reflects the acceptance of increased corporate responsibility for the progressive improvement of key elements of worker and producer well-being” (Macdonald, 2007) is proof of the recognition that they must build upon their relationship with coffee bean farmers to ensure sustainability. These programs give guidelines for working with coffee farmers to ensure high-quality coffee and promote “equitable relationships with farmers, workers and communities as well as protecting the environment” (Enquist, 2007). Starbucks success in entering new markets relies on its ability to “cultivate meaning relationships with customers and local community leaders” (Enquist, 2007). Starbucks continually reinforce their commitment to corporate social responsibility and in doing so; ensure that its activities within the company and stakeholders are widely publicised instilling trust as a global and local corporation. This image is transferred further in there sales items, where the moral significance of purchasing fair-trade branded goods is widely publicised and therefore enhances corporate reputation.

5.0 Ethical Evaluation and Recommended Action

5.1 Ethical Evaluation

There is the need and opportunity to improve the sustainability of the coffee market on a local, regional and global level. The primary focus of Starbucks future operations must focus on the integration of economic imperatives within a framework of social and environmental responsibility in order to create a sustainable enterprise. Within this report I have argued that Starbucks have consistently applied their corporate ethical values and consequently are well placed to achieve their ambition of being a corporate responsibility leader.

The greatest threat to the sustainability of current coffee production practices lies in their social impact as they define, the economic conditions facing coffee producers. Producers depend directly upon the coffee market for revenue and declining trade in coffee can result in reduced resources for social essentials such as medical services and education. Starbucks recognition of this is demonstrated by their implementation of ethical theory, and with their “ethics of rights”, they consider whose rights need to be respected and whether the fundamental rights of these people are being respected (Crane and Matten, 2004). By addressing the rights of the producers, Starbucks provide better conditions for coffee farmers, helping to maintain a co-operative relationship and mitigating the impact of any negative press received. In doing so Starbucks ensure continuation in coffee harvesting in areas of high biodiversity is beneficial to all parties involved.

My recommendation for Starbucks to improve the sustainability of their future would be to provide even further support for the communities and workers involved in the production of coffee. This could be done by ensuring;

Producers should be paid wages that cover; production, living and environmental costs at a flat rate rather than being dependent on the variable commodity pricing of coffee.
Employment restrictions should be applied in accordance to international governing bodies rather than local laws.
Provide or promote mutual support among farmers to solve management problems in the farm; developing a community spirit.
Promote the guidelines needed to achieve fair-trade certification so more producers can benefit. Fair trade certification is available only to small farmer groups and organizations – promote the guidelines needed to be met to achieve fair-trade status so more producers benefit.

My research on the ethical philosophies espoused by Starbucks has led me to believe that this is a corporation which clearly understands that while shareholder demands for economic performance are unrelenting; their satisfaction would not be possible if they were cynical in applying ethical principles to their business operations. It is their realisation of the need to respect all stakeholders, particularly those involved in their supply chain that allows them to be confident of a sustainable future. It is clear to me that the Starbuck executive pays as much attention to their “licence to operate” granted by public acceptance, as they do to their profits. I believe this is a company that clearly recognises the connection between market dominance and CSR leadership and have focused on the latter to achieve the former. I believe that Starbucks ethical focus is the foundation stone for their creation of a successful and enduring enterprise.

References

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