ge9 cell matrix (2)

S.P. MANDALI’S

R. A PODAR COLLEGE OF COMMERCE AND ECONOMICS

MATUNGA, MUMBAI-400 019.

A PROJECT REPORT ON

General Electric (GE) Nine Cell Matrix

SUBMITTED BY

RUTUJA D. CHUDNAIK

M.COM (SEM. I): STRATEGIC MANAGEMENT

SUBMITTED TO

UNIVERSITY OF MUMBAI

2014-2015

PROJECT GUIDE

Prof. Dr. B.B. Kamble

Strategic Management

S.P. MANDALI’S

R. A PODAR COLLEGE OF COMMERCE AND ECONOMICS

MATUNGA, MUMBAI-400 019.

CERTIFICATE

This is to certify that Mr/Ms. Name Rutuja D. Chudnaik of M.Com ( Business Management/

Accountancy) Semester I (2014-2015) has successfully completed the project on Strategic

Management

under the guidance of Prof. Dr. B.B. Kamble

Project Guide/Internal Examiner External Examiner

Prof. _______________________ Prof. ________________________

Dr. (Mrs) Vinita Pimpale Dr.(Mrs) Shobana Vasudevan

Course Co-ordinator Principal

Date Seal of the College


ACKNOWLEDGEMENT

I acknowledge the valuable assistance provided by S. P Mandali’s R. A. Podar

College of Commerce & Economics, for two year degree course in M.Com.

I specially thank the Principal Dr.(Mrs) Shobana Vasudevan for allowing us to use

the facilities such as Library, Computer Laboratory, internet etc.

I sincerely thank the M.Com Co-ordinator for guiding us in the right direction to

prepare the project.

I thank my guide Prof. Dr. B.B. Kamble who has given his/her valuable time,

knowledge and guidance to complete the project successfully in time.

My family and peers were great source of inspiration throughout my project, their

support is deeply acknowledged.

Signature of the Student


DECLARATION

I, Rutuja D. Chudnaik of R. A. PODAR COLLEGE OF COMMERCE &

ECONOMICS of M.Com SEMESTER I, hereby declare that I have

completed the project General Electric (GE) Nine Cell Matrix

in the academic year 2014-2015 for the subject Strategic Management .

The information submitted is true and original to the best of my knowledge.

Signature of the Student


INDEX

SR. No. PARTICULARS PAGE NO.

1.

GE/McKinsey Matrix –INTRODUCTION

BRIEF HISTORY

01

2. THE APPROACH – FACTORS AFFECTING

INDUSTRIAL ATTRACTIVENESS AND

BUSINESS STRENGTH

05

3. APPLICATION OF GE NINE CELL MATRIX 13

4. CASE STUDY – STARBUCKS 18

5. REFERENCE/ BIBLIOGRAPHY 43


General Electric (GE) Nine Cell Matrix

GE/McKinsey Matrix

INTRODUCTION

The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix used to perform business portfolio analysis

as a step in the strategic planning process.

The GE/McKinsey Matrix identifies the optimum business portfolio as one that fits perfectly to the

company's strengths and helps to exploit the most attractive industry sectors or markets.

Thus, the objective of the analysis is to position each SBU on the chart depending on the SBU's

Strength and the Attractiveness of the Industry Sector or Market on which it is focused. Each axis is

divided into Low, Medium and High, giving the nine-cell matrix as depicted below.


SBUs are portrayed as a circle plotted on the GE/McKinsey Matrix, where the size of the circle

represents a factor such as Market Size.

The GE/McKinsey Matrix differs from other tools, like the Boston Consulting Group Matrix, in that

multiple factors are used to define Industry Attractiveness and Business Unit Strength.

Each factor can be given a different weighting in calculating the overall attractiveness of a particular

industry.

Typically:

This template allows the user to define up to 10 SBUs to be plotted. Up to 10 different factors can be

used to define Industry Attractiveness; Typical factors would be Market Size, Market Growth Rate,

Industry Profitability, Competitive Rivalry, etc.

Up to 10 factors can also be used to define SBU Strength. Typical factors are Market Share,

Distribution Channel Access, Financial Resources, R&D Capability, etc

The factors and their relative weightings are selected. The rating values for each factor are entered

for each SBU and Industry.

The SBU Strength and Industry Sector Attractiveness are calculated and the GE/McKinsey Matrix is

automatically produced.

The format used to produce the Matrix is a MS-Excel Bubble Chart. Industry Attractiveness and

Business Strength are plotted on the X and Y axes. The size of the Bubble allows a further factor to

be depicted on the chart. The default factor used is Market Size. However, a Dropdown list is


available allowing the user to dynamically select any of the Industry Attractiveness factors as an

alternative.

Interpreting the Matrix

The matrix can be partitioned into three segments representing a health indicator for any given

product or SBU, the upper left segment (shown in green) reflects businesses that are strong relative to

competition and in a market that is attractive. These businesses warrant resource allocation and

should be developed to grow market share.

The middle segment (shown in orange) covers businesses that are question marks (see BCG Matrix).

Products or SBUs in this region are either mediocre performers in mediocre markets, strong

performers in unattractive markets, or weak performers in attractive markets. In any case, they

require more evaluation to determine whether to invest and attempt to grow them or whether to divert

resources or divest of them entirely.

The last segment represents the businesses that rate poorly both in competitive strength and market

attractiveness. These should either be repositioned to exploit more attractive markets or their

resources should be reevaluated to determine if they would be more effectively used elsewhere.

BRIEF HISTORY

In the late sixties and early seventies, while the Boston Consulting Group were devising the BCG or

Growth Share matrix, General Electric, a leading corporation in the United States, were also looking

at concepts and techniques for strategic planning. The firm was disappointed in the profits that they

had made from their investments in the various businesses, which suggested flaws in GE’s approach


to investment decision-making. They became interested in the Growth-Share matrix and liked the

visual approach depicting the positioning of a firm’s businesses on the matrix. General Electric, from

all their own strategic planning research, objected to the two dimensional matrix which relied on

market growth for industry attractiveness and relative market share for business strength.

McKinsey and Company

GE asked McKinsey and Company, a consulting company in the USA, to develop a portfolio

approach with a wider dimension than the BCG matrix. In 1971 McKinsey and Co developed the

business screen for General Electric to differentiate the potential for future profit in each of the 43

strategic business units. This matrix is also known as the industry attractiveness – business strength

matrix and the nine-box matrix.

Strategic Emphasis

This matrix was designed to overcome the shortfalls that companies were encountering with the BCG

matrix and to fill the requirement to compare numerous and diverse businesses. The scope of

application for this model extends from a corporate level to a business level incorporating the

products making up the business.

Flexibility

The matrix can be described as a multifactor portfolio model and it has a greater flexibility compared

to the BCG, in terms of the elements that can be included. The matrix allows a company to assess the

fit between the organisational competencies and the business/product offerings. It also introduces the


forecasted positioning of businesses/products on the matrix facilitating the strategic planning process.

The matrix has nine cells compared to the BCG four cells and the scores on the axis can be rated low,

medium, high compared to the BCG high and low.

THE APPROACH

This model suggests that the long run profitability of each unit is influenced by the unit’s business

strength and that the ability and incentive of a firm to maintain or improve its position in a market

depends on the industry attractiveness.

Factors that Affect Industry Attractiveness

Whilst any assessment of Industry attractiveness is necessarily subjective, there are several

factors which can help determine attractiveness. These are listed below:

Industry growth

differentiate products and services


Factors that Affect Business Strength

Relative cost position

Who Defines the Factors?

The factors are usually identified by a representative, experienced group of managers from the firm

including corporate, business and functional managers.

An explicit understanding of what constitutes a potentially profitable environment is essential to the

formulation of strategy and for the understanding of the potential impact of competitors.

A market or industry is considered to be attractive if its potential for providing a significant

contribution to objectives for earnings growth and return on investment is judged to be high.

Examples of Industry Attractiveness Factors

Different strategists and consultants have devised different sets of variables for industry or market

attractiveness indicating that there is no consensus regarding the factors that make up industry

attractiveness but the final factor selection is a subjective evaluation conducted by the firm.


Not all of the factors have equal attractiveness to every company. They must be weighted

accordingly to determine how much each factor contributes to the attractiveness of the industry to

which the business belongs.

The criteria or factors must be consistent for all the industries that the firm competes in so that

comparisons between the various strategic businesses can be made.

This approach considers not only the objective factors such as sales, profit, ROI for example but also

gives weight to the subjectively estimated factors such as volatility of market share, technology,

employee loyalty, competitive stance and social need.

The GE-McKinsey model can be likened to the more generalised and well-known SWOT (strengths,

weaknesses, opportunities, threats) analysis as it allows the addition of both internal and external

factors in the matrix construction. The competitive position or business strength represent the internal


capabilities which are controllable by the company while the external factors which are not

controlled by the company (opportunities and threats) make up the industry attractiveness.

Value of the Model

This portfolio model also allows the business/product to be analysed in terms of dimensions of value

to the organisation (Industry Attractiveness) and dimensions of value to the customer (Relative

Business Strength). The GE McKinsey or Attractiveness- Strength matrix is important primarily for

assigning priorities for investment in the various businesses of the firm, it is a guide for resource

allocation and does not deal with cash flow balance, as does the BCG.

1.The three cells at the top left hand side of the matrix are the most attractive in which to operate and

require a policy of investment for growth – these are usually coloured green.


2. The three cells running diagonally from left to right have a medium attractiveness, are coloured

yellow and the management of businesses within this category should be more cautious and with a

greater emphasis being placed on selective investment and earning retention.

3. The three cells at the bottom right hand side are the least attractive, therefore coloured red and

management should follow a policy of harvesting and / or divesting unless the relative strengths can

be improved.

Channon and McCosh devised a set of generic investment strategies for the GE McKinsey

matrix as labelled in the previous diagram. A. T. Kearney also put forward guidelines for

strategies in the different boxes and where these have not been incorporated they are

mentioned below. (ATK = A.T. Kearny)

Grow / Penetrate –

These businesses are a target for investment, they have strong business strengths, are in attractive

markets and they should therefore have high returns on investment and competitive advantage. They

should receive financial and managerial support to maintain their strong position and to continue

contributing to long-term profitability.

ATK – Seek dominance

Grow

Maximizes investment

Invest for Growth –

Businesses here are in very attractive industries but have average business strength. They should be

invested in to improve their long-term competitive position.

ATK – Evaluate potential for leadership via segmentation


Identify weaknesses

Build strengths

Selective Investment or Divestment –

These businesses are in very attractive markets but their business strength is weak. Investment must

be aimed at improving the business strengths. These businesses will probably have to be funded by

other businesses in the group as they are not self-funding. Only businesses that can improve their

strengths should be retained – if not they should be divested.

ATK – Specialise

Seek niches

Consider acquisitions

Selective Harvest or Investment –

Businesses in this box have good business strength in an industry that is losing its attractiveness.

They should be supported if necessary but they may be self-supporting in cash flow terms. Selective

harvesting is an option to extract cash flow but this should be done with caution so as not to run

down the business prematurely.

ATK – Identify growth segments

Invest strongly

Maintain position elsewhere

Segment and Selective Investment –

Businesses with average business strengths and in average industries can improve their positions by

creative segmentation to create profitable segments and by selective investment to support the

segmentation strategy. The business needs to create superior returns by concentrating on building

segment barriers to differentiate themselves.

ATK – Identify growth segments


Specialise

Invest selectively

Controlled Exit or Harvest –

Businesses with weak business strengths in moderately attractive industries are candidates for a

controlled exit or divestment. Attempts to gain market share by increasing business strengths could

prove to be very expensive and must be done with caution

ATK – Specialise

Seek niches

Consider exit

Harvest for Cash Generation –

Strong businesses in unattractive markets should be net cash generators and could provide funds for

use throughout the rest of the portfolio. Investment should be aimed at keeping these businesses in a

dominant position of strength but over investment can be disastrous especially in a mature market.

Be aware of competitors trying to revitalise mature industries

ATK – Maintain overall position

Seek cash flow

Invest at maintenance level

Controlled Harvest –

They have average business strengths in an unattractive market and the strategy should be to harvest

the business in a controlled way to prevent a defeat or the business could be used to upset a

competitor.

ATK – Minimise investment

Position to divest


Rapid Exit or Attack Business –

These businesses have neither strengths nor an attractive industry and should be exited. Investments

made should only be done to fund the exit.

ATK – Trust leaders statesmanship

Go after competitors cash generators

Time exit and divest

Market Attractiveness-Competitive-Position Portfolio Classification and Strategies

APPLICATIONS OF GE NINE CELL MATRIX

units or if a business unit is made up of a number of different product lines. General Electric used

this matrix at five different levels in the organisation: product, product line, market segment, SBU,

business sector.


businesses of the firm and is guidance for resource allocation. (Hax & Majluf 1983) Investment is

assigned according to the generic strategies laid out above but generally is given to businesses who

show strength in an attractive market.

businesses making up the firm can be analysed on the matrix, at the business unit level, the products

making up the business’s portfolio can be mapped out onto the matrix.

ent and

forecasting the future positions by assessing the factors constituting the business strengths. It allows

an organisation to focus on the strengths and weaknesses of the business units or products.

Model weaknesses

-scientific’ approach referring to the

method of weighting the factors before assessing them. Some critics ascertain that the factors of

business strength and some of the industry attractiveness factors cannot be measured.

matrix will be consistent in terms of the criteria. Some firms develop standard lists of internal and

external factors but each business/product is different and factors will vary accordingly.

assessing the relevant factors


Composite dimension matrices such as this one may mask important differences among products.

(E.g. If business strength is made up of two factors weighted similarly, one product may be assessed

as very low on the one factor and very high on the other one. Another product may score vice versa

but both will be positioned on the same spot on the business strength axis.)

criticized in the past but the more complex GE matrix

has also been accused of being too complicated and taking too long to complete.

matrix pays too little attention to the business environment GE/McKinsey.

Advantages –

1) It used 9 cells instead of 4 cells of BCG

2) It considers many variables and does not lead to simplistic conclusions

3) High/medium/low and strong/average/low classification enables a finer distinction among

business portfolio

4) It uses multiple factors to assess industry attractiveness and business strength, which allow users

to select criteria appropriate to their situation

Limitations –

1) It can get quite complicated and cumbersome with the increase in businesses

2) Though industry attractiveness and business strength appear to be objective, they are in reality

subjective judgments’ that may vary from one person to another


3) It cannot effectively depict the position of new business units in developing industry

4) It only provides broad strategic prescriptions rather than specifics of business policy.

Advantages Over BCG Matrix

The McKinsey/GE version holds several advantages over the classic BCG Matrix. The market

attractiveness measure is much broader and encompasses more factors than the narrower market

growth rate measure of the BCG matrix. Likewise, the competitive strength measure replaces the

more basic market share of the BCG and accounts for more factors than solely a product’s ownership

of the market.


CASE STUDY - STARBUCKS COFFEE COMPANY

Executive Summary

Starbucks Coffee Company, founded in 1971 is headquartered in Seattle, WA and operates in 37

countries around the world. The backbone of Starbuck’s business is its company-operated retail

stores. Starbucks has employed a strong differentiation strategy in order to turn a traditional $.50

commodity into a $4 experience. This following report provides an analysis of the strategies used by

Starbucks to stay on top of its growing and volatile industry.

Starbucks’ governing principles are based on three strategic stances: the third place experience,

creating a human connection, and providing a quality everyday experience for customers.

The specific strategies used by Starbucks include:

• Horizontal Integration: acquisitions of Seattle’s Best, Torrefazione Italia and Coffee People

• Market Penetration: differentiation and product placement outside of retail stores

• Market Development: educating the consumer about specialty coffee

• Concentric Diversification: release of bottled drinks, Ice Creams, and Liqueur


• Conglomerate Diversification: expansion into music and movies

• Value Chain Development: the human connection gained by business ecosystem maintenance

The overall level of competitive threat in the coffeehouse industry is moderate. This is due primarily

to the moderate threat of green coffee supply and the moderate to high threat of competitors. These

two threats carry more weight than the lower threats of buyers, substitutes, and new entrants.

Competition is traditionally considered to be other specialty coffeehouses. However, when one

considers other fast food retailers serving coffee, such as McDonald’s, the threat of rivalry

intensifies.

Many opportunities exist for Starbucks in this industry. The premium coffee market continues to

grow, offering opportunities such as rural U.S. expansion and continued international proliferation.

The firm may also be able to create new distribution channels for other products as it has done with

music, DVD’s, and books. Premium and proprietary food offerings can be used to drive growth in

order to compete with fast food restaurants, and acquisitions and joint venture/licensing agreements

provide additional possibilities for brand leverage. The Starbucks brand is very strong, but more

steps can be taken to ensure that it becomes an enduring global brand.

Strengths of the firm lie in its tremendous brand image and loyalty, innovative business strategy, and

strong financial performance over the long-term. Weaknesses lie in Starbucks’ heavy reliance on the

U.S. market for sales, its image as an enormous, dominating corporation, possible overcrowding and

storefront cannibalism, and the price sensitivity of other nations. This report provides a VRIO

analysis based on Starbucks’ value chain, which indicates that the firm has core competencies in the

areas of human resource management, marketing, and operating retail locations. Based on the

analysis provided in this report we maintain that Starbucks is a strong company that is well


positioned for steady growth. We are recommending the firm as a buy with a long-term focus on

returns.

OVERVIEW OF THE ORGANIZATION

Starbucks Coffee Company was founded in 1971, opening its first location in Seattle’s Pike Place

Market. It was named after the first mate in ’s Moby Dick, is the world’s leading retailer, roaster and

brand of specialty coffee with coffeehouses in North America, Europe, Middle East, Latin America

and the Pacific Rim. Worldwide, approximately 35 million customers visit a Starbucks coffeehouse

each week.

Starbucks is all about purchases and roasts high-quality whole bean coffees and sells them along with

fresh, rich-brewed, Italian style espresso beverages, a variety of pastries and confections, and coffee-

related accessories and equipment – primarily through its company-operated retail stores. In addition

to sales through their company operated retail stores, Starbucks sells whole bean coffees through a

specialty sales group and supermarkets.

Furthermore, Starbucks produces and sells bottled Frappuccino coffee drink and a line of premium

ice creams through its joint venture partnerships and offers a line of innovative premium teas

produced by its wholly owned subsidiary, Tazo Tea Company. The Company’s objective is to

establish Starbucks as the most recognized and respected brand in the world.

In realizing and achieving this goal, the Company plans to continue to rapidly expand its retail

operations, grow its specialty sales and other operations, and selectively pursue opportunities to

leverage the Starbucks brand through the introduction of new products and the development of new

distribution channels.


INTRODUCTION

Starbucks Coffee Company, founded in 1971 as a humble coffee shop in Seattle’s Pike Place Market,

has since grown into a dominant multinational corporation operating in 37 countries and serving over

40 million customers every week. At the end of fiscal 2005 Starbucks owned and operated nearly

5,700 coffeehouses around the world and licensed an additional 3,200 locations, generating $780

million in profit on revenues of $6.4 billion. The firm has employed a multitude of well-focused

strategies in order to capture the bulk of its growing market and remain on top of the competition.

The Starbucks mission and principles are encompassed by three major strategic stances: the

third place experience, establishing a human connection, and providing quality everyday

experiences. The third place experience is created by Starbucks’ unique ambience. Tom Barr,

VP of Food for Starbucks said, “ambience is very hard to communicate. Usually if someone

is asked why they love a particular store they would not say ambience as the first thing.

Customers might say they don’t care about the ambience; that they just want their coffee fast.

Ninety percent of people that walk into a store will never stop to read the paper or sit outside


with their dogs. But in the back of these customer’s minds there is something that says ‘I

wish I could do these things and I’m glad that such a place exists.’ There is a subconscious

signal that this is a good place to be. That is the power of the third place.”

Starbucks also strives to maintain a human connection through ecosystem management,

sustainable practices, supplier networks maintenance, firm transparency, and innovation.

Lastly, Starbucks’ customers aren’t united by demographics, but rather by a desire to seek

quality everyday experience. Company-operated stores are the backbone of Starbucks’

business. This is where the third place experience is most prevalent. The goal of the retail

stores is to offer a place outside of the home and office for customers to relax and gather.

Last year Starbucks opened 735 new retail storefronts. Ten percent of Starbucks’ business is

in licensing the brand to other locations (i.e. Fred Meyer). While employees at these licensed

stores are required to follow Starbucks’ detailed operating procedures, they do not receive all

of the benefits of a company-operated store employee. The firm also has licensing

arrangements with Kraft Foods and SYSCO to market, distribute, and promote food items to

grocery stores and warehouse clubs. Partnerships have emerged from these licensing

arrangements. The famous Frappacino drinks are bottled and distributed through Pepsi Co.,

Starbucks ice cream products are made possible through a partnership with Dreyer’s Grand,

and the new Starbucks coffee liqueur is made by Jim Beam Brands Co.

Other initiatives, representing less than 1% of Starbucks’ business include music, movies,

and the Starbucks Duetto Visa credit card.


STRATEGY IN ACTION COMPETITIVE FORCES FOR STARBUCKS

BARRIERS TO ENTRY

There are few barriers to entry into this industry. There is nothing in the technology of coffee

production which creates a significant obstacle to entering the industry, for example no

significant economies of scale or scope. A small player can easily set up a coffee shop. The

major entry problem is location. There are a limited number of locations in the centre of any

town, easily accessible to potential customers, such as shoppers or businesspeople during the

day and those attending entertainment venues during the evening. With the advent of the

expresso cart, the importance of location is retained but access to suitable locations made

much easier. The saturation of good locations by Starbucks is a deterrent, the company being


prepared to cannibalize existing stores, with an initial loss of as much as 30% of sales, on the

assumption that the additional stores will expand total demand to compensate. Starbucks has

a reputation for predatory rental behaviour, paying over the odds in rent for a good location.

It might even rent or lease and keep a venue empty.

Although Starbucks spends as little as $30 million on advertising, or 1% of its revenues, its

brand nameis an increasing factor in deterring entry, established by word of mouth and

repeated visits.

EXISTENCE OF SUBSTITUTES

In its broadest sense, a substitute is anything offering the same experience. The sale of

specialty coffee in grocery stores and its consumption at home is a substitute. In its narrow

sense tea, juice, soft drinks, alcohol and other flavoured coffee and non-coffee related drinks

are possible substitutes. Starbucks provides some of these. The Starbucks coffee experience

is a package of attributes. The overall experience comprises the ambience of the venue,

including decor and musical background, the acceptability of the clientele, predictability of

the product, convenience and ease of payment and even the availability of Internet facilities.

Starbucks innovates to cut transaction costs and speed up service, introducing automatic

expresso machines in some stores and prepaid Starbucks cards. In its 60 Denver stores it is

possible to prepay on the phone or the Starbucks Express website and have the coffee waiting

on arrival at the store. Starbucks claims the largest Wi-Fi network in the world, a high-speed

wireless Internet service to about 1,200 stores in North America and Europe, developed

together with Mobile International and Hewlett-Packard. The coffee house works as an office

where you can check your emails and download multimedia presentations. Starbucks


provides an initial 24 hours of free wireless broadband, backed up by a variety of monthly

subscription plans. The aim is to fill the stores in the period between the breakfast and lunch

rushes, and win the support of the generation just entering the workforce.

BARGAINING POWER OF SUPPLIERS

Because Starbucks purchases high-quality coffee, suppliers give priority to Starbucks and

work closely with the company to ensure prompt delivery and good quality. During the last

13 years the price of coffee has plummeted, peaking at US$3.15 per pound, but now at an

average price as low as US$45 cents. The grower receives far less, since the intermediaries

take their cut. The first International Coffee Agreement was negotiated in 1962, a

complicated set of quotas for more than 60 coffee-growing countries, designed to keep prices

reasonably stable. This it managed to do for 25 years, despite endless renegotiation. In 1989

the USA withdrew its support; the agreement was suspended and the price began to fall.

Before 1989 the price had hovered around the US$1.20 mark. Supply ran ahead of demand,

with new producing areas such as Vietnam becoming significant. During the 1990s world

production rose by 21%, demand by 10%. The typical coffee producer is small, although the

purchase by cooperatives or middlemen, including exporters, increases somewhat the market

power of suppliers. The cooperatives do not have the market clout of Starbucks, which could

easily apply considerable pressure on producers, hardly necessary, given the level of coffee

prices in world markets. To access a wide variety of coffees and hedge the risks to local

supply, Starbucks buys 50% of its beans from Latin America, 35% from the Pacific rim and

15% from East Africa. Increasingly Starbucks blends the coffees. With a global reach and

access to modern procurement techniques, Starbucks makes purchases to minimize cost.


BARGAINING POWER OF PURCHASERS

The typical customer purchases a cup of coffee at one of Starbucks’ retail outlets and has

little bargaining power. Starbucks has agreements with retailers, wholesalers, restaurants and

other service providers to carry Starbucks coffee. Starbucks sought out leaders in the various

fields, including the airline United Airlines, supermarket chains Nordstrom and PriceCostco,

using a special brand name Meridian, bookstore Barnes & Noble and a supplier of business

services ARAMARK. Starbucks has worked to develop new products: with PepsiCo to

develop the frappuccino, a milk-based cold coffee beverage in a bottle; with Red Hook

Breweries to supply an ingredient for a stout; and with Dreyers’ Ice Cream to develop its own

ice cream which it distributes through Dreyers’ grocery channels. These companies have

many more resources than the usual Starbucks customer and can negotiate from a stronger

position.

INTENSITY OF COMPETITION

In developed economies there is a ‘retailing war’ between coffee chains, and between the

local retail outlets of such chains and individual coffee shops.Starbucks is the largest player.

In the USA there is no nationwide competitor. McDonald’s McCafe outlets are expanding

rapidly, but they have a downmarket image. The strategy of McDonald’s has changed, from

simply capturing the passing trade through low price, to making the outlet a ‘destination’. In

1997 in North America when Starbucks was beginning to take off, there were 3,485

competitors, mostly one store establishments with no plans to expand. Starbucks’ main

competitor in the specialty coffee area was Second Cup, a Canadian company, a franchiser,


traditionally mall-based but increasingly using stand-alone locations like Starbucks. The

forces of competition are strong in this industry, so it is remarkable that Starbucks has

established itself as such a dominant player.

THE STRATEGY OF STARBUCKS

The main strategy of Starbucks is to establish a reputation for high-quality coffee, in effect to

brand the company so that it can set a premium price, one which offers the company a profit

margin way above that normally made in such an industry.

There are various ways in which it seeks to do this. It does it by emphasizing the quality of

the product. It roasts the beans itself and after much experimentation created a taste which is

unique, or claimed to be unique. It also uses technology, in this case the oneway valve bags

to retain the freshness of the beans for the maximum possible period of time. It has developed

a mystique about coffee. Another method of emphasizing quality is stressing excellence in

everything the company does or sells. The focus is not just on the product, the coffee. It is

also on the nature of the coffee shops themselves and the enthusiasm and good attitude of

staff. Any other products which Starbucks uses or sells, such as coffee-making machines,

grinders, coffee filters, storage containers or just coffee mugs, must come up to the same high

standards as the coffee. There are three main areas to be considered in discussing the strategy

adopted: the treatment of employees, principally the influence of this on their motivation; the

choice of location for the stores, since this is vital to the whole coffee-drinking package; and

the image presented by the Starbucks name, both domestically and internationally, and the

management of that image. All staff from CEO to baristas (bar people) are, in theory,

regarded as partners, not employees. Even part-time staffs receive stock options, so-called


‘bean stock’. Starbucks baristas are paid slightly higher wages than is the norm in the food

service industry. They are given health insurance, disability and life insurance, and a free

pound of coffee each week. The baristas who serve the coffee are usually college or

university students. They are carefully selected and receive a significant amount of training, a

minimum of 24 hours, ensuring that they can answer any question asked about coffee which

may be put to them. Even executive staffs have to work in a store for two weeks to gain

customer experience. Starbucks has aimed to have a very flat organizational structure, partly

in order to ensure close contact between management at headquarters and the operational

staff actually selling the coffee. It is unclear how Starbucks can maintain the initial culture of

the staff, the high level of motivation and enthusiasm which marked the early years. Since

venue is critical, the policy on location is an important part of strategy. Starbucks is happy to

establish stores in close vicinity with each other, provided the location is good. One joke

popular among staff stressed the close vicinity, by inventing a headline, ‘Starbucks

establishes new store in rest room of existing store’. Starbucks has a team of property

managers and others working to find the best sites for retail outlets. It needs to find such

outlets at a rate of at least one a day in North America alone. The initial target was the main

street of every major North American city, now it is the main street of all regional centres.

Starbucks has turned to using espresso carts or kiosks, called Doppio espresso carts. It is in

the process of branding the humble cart. An eight-foot by eight-foot cube unfolds into a large

stand with a clear Starbucks identity which can be used for street corners, train stations and

shopping malls. What is the population needed to support a coffee shop? This sets the

threshold population size. In Seattle there is a store for every 9,400 people, the highest

density anywhere. A more realistic target is said to be 55,000 in the USA and 56,000 in


Canada (the Coffee Specialty Association of America believes it could be half this figure,

although almost half these would be coffee carts rather than stores). This would in theory

mean that North America could support almost 5,000 specialty coffee retail outlets.

In 1997 Starbucks had just over 1,000 stores, or just over 20% of the maximum possible

number. In the large urban markets, it had already reached almost one-third of the potential

maximum. Rapid growth since then has moved the number much closer to the notional

maximum. Today Starbucks has 4,247 shops, not far off a possible saturation point, although

there are still eight states where there are none and Starbucks may not accept the rather

conservative views of the various authorities, seeing Seattle as an indication of the potential.

Essential to Starbucks is an integrated and efficient supply chain, whether it is supplying the

retail store units, the specialty sales and wholesale channels, the mail order business, which is

also important, or the grocery channel. The main growth vehicle is clearly the retail outlet,

but the other channels help to boost the demand and establish the reputation. Starbucks only

entered international markets when it had already established itself firmly in the USA. It

therefore moved abroad from a position of strength. Its strategy was to seek good partners

abroad. It chose to make its international entry in the Asia Pacific area, because of the

enormous size of the market and its potential for growth. A higher population base is needed

in many Asian countries in order to support one store but the population of Asia is so large

that the number of stores could easily outnumber those in the USA within a short period of

time. It chose to start in Japan in 1997. As Starbucks has moved to a point at which the North

American market is saturated, overseas expansion has become critical to sustaining rapid

growth. In 2002 a further 1,177 stores were opened, bringing the total to 6,000. In three years

the aim is to have 10,000 stores worldwide. Starbucks is clearly expanding in dramatic style


internationally and at the breakneck pace at which it had already opened up the American

market. The eventual goal is very ambitious, 20,000 stores worldwide. It has considerable

room for further expansion. The problem is that the nature of the competition in other

countries differs from that in the USA. The model adopted in Japan, in which the foreign

expansion began, was very much the same as that used in North America, with one

exceptional feature which related to the organizational structure. Starbucks set up a joint

venture with a local retail partner, Sazaby Inc, which Starbucks then licensed to use the

Starbucks model. Elsewhere in Asia, such as Thailand and South Korea, it initially issued a

licence to a local operator, but later converted the local operator into either a partner in a joint

venture or a wholly owned subsidiary. With licensing and the use of partners, there is always

the problem of maintaining the quality of coffee product and store, and maintaining the brand

image. The bigger the organization, the bigger the problem.

KEY SUCCESS FACTORS

Why is specialty coffee the basis for the success achieved by Starbucks?

There are a number of factors which have been important:

• There has been a switch in demand towards real coffee, and away from instant coffee,

largely associated with the notion of real coffee as the superior product. There is also a

tendency to replace low-quality coffee with higher quality coffees. This is partly a reflection

of rising incomes and more informed consumers. Consumers have more discretionary income

and the income elasticity of demand for specialty coffee rises with income. Consumers also

know much more about coffee, which has developed something of the mystique of wine. It is

now as socially valuable to know something about good coffee, as it is about good wine.


• The attempt to adopt a healthier lifestyle, particularly strong in the USA, and the campaign

against drink driving, everywhere in the advanced world, has pushed consumers towards the

consumption of non-alcoholic beverages. Coffee is an attractive alternative.

• After an initial emphasis on home entertainment, with videos and pay television, there is a

return to regular ‘going out’ in developed countries, as shown by the revived popularity of

cinema going. The coffee bars is a place where people ‘going out’ can easily meet and talk. It

has also long been a locus of business activity for independent consultants, creative people

and teleworkers’, but is also becoming a job search centre for the professional unemployed.

• Specialty coffee is an affordable luxury or aspirational good. Drinking Starbucks coffee

conjures up the image of relaxed affluence (Fowler, 2003). It is part of what has been called a

‘democratization of luxury’. The neologisms ‘masstige’ or ‘boutiqeing’ have been coined to

capture the combination of both mass market and prestige which attaches to the products

which qualify as aspirational. Middle-market consumers selectively trade up to higher levels

of quality, taste and aspiration. This involves the creation of the perception of luxury in

goods and services that are hardly luxurious. Starbucks is in good company with the ‘super

housewife’ Martha Stewart or designer pet food.

CHANGE STRATEGY – MCKINSEY’S MODEL:

The strategy employed by Starbucks could be analysed using the McKinsey Framework

(McKinsey Quarterly, 2008).

The Experience:


Starbucks implemented the concept of the ‘third place’ to perfection around the world, with

amenities such as free wi-fi and music being the order of the day, with a focus on making the

place inviting and comfortable. As Ray Oldenberg, the original protagonist of the concept of

the third place, agrees (Orsini, 2011), it is about the place where people come in just for the

experience of it, not necessarily to buy stuff.

Product improvement:

Starbucks made its coffee stronger in England and Ireland in specific products – lattes,

cappuccinos, mochas and caramel macchiatos.

Expansion:

After closing down five stores in 2009, the company is expanding with licensing

arrangements in the market, with 26 stores now, as against 22 last year (Irish Times, 2012).

The company plans to fuel its expansion by opening own stores rather than go about the

licensing route.

Systems:

In an effort to pep up its brand value, Starbucks got into the Social media business,

promoting its brands through channels such as Facebook, Twitter and YouTube. And its

efforts haven’t gone in vain, with Starbucks appearing second among the top 100 social

media brands, as per the ranking and report compiled by Brandwatch, the social media

monitoring service and publicised in Social Brands 100 (2012).

Shared Values:


The company focuses on creating an experience that is equivalent to the ‘third place’, where

people would find it convenient, comfortable and inviting to get to the premises for the sake

of the experience; a third place apart from home and work for people to hang around.

Sustainable Sourcing was another initiative that was taken to quell the voice of opposition

around the world, accusing Starbucks of exploiting third-world farmers through unethical

supply chain practices. In one fell swoop, the company decided to “actively cultivate and

reward environmentally and socially responsible suppliers”, with the whole idea behind the

initiative being all about forming a new paradigm in forging supply chain relationships,

which could lead to mending the company’s global branding and drive the company’s growth

around the world. Finally, Starbucks found a way to give it back to the community and has

made it a wise business decision as well – the company has recruited a good number of

veterans and has formed what is called the “Starbucks Armed Forces Network” (Scott, 2012).

Structure:

The structure in Starbucks is that of a matrix organisation, where the reporting structures

highlight a long hierarchy with a top-down command flow. Further, there is much emphasis

on compliance to organisational standards from individual retailer units as well as from the

licensed partners.

RESULTS OF CHANGE STRATEGY

The results of the changed strategy was there to be seen in terms of improved sales, larger

geographical reach, enhanced brand image, improved supply chain relationships and better

products.


Starbucks hit profits in Ireland to the tune of €490,000 in the year to October 2011, as against

a loss of €3.3 million the previous year, according to Irish Times (2012). While the

company’s turnover actually fell from €16.2 million to €15.4 million from the previous

year’s figures, the profits have come from improved margins on account of cost cutting and

curtailing of administrative expenses.

The company was on a global expansion spree with a keen eye on China, predicting that

China would be its second largest market around the world by 2014, the key to its global

expansion (Business & Leadership, 2012).

The initiatives taken by the company in engaging the veteran community for employment,

when unemployment rates among the veterans have been much higher than that of the

civilian population, has borne fruits in the form of the company being among the select few

to have been invited for the Social Innovation Summit 2012 (Scott, 2012), to “analyze

innovative approaches and build lasting partnerships . . . to affect positive change” (Social

Innovation, 2012). This has resulted in enhanced goodwill in terms of being socially

responsible and in being a good corporate citizen.

Internal metrics had improved to show higher levels customer satisfaction, such as employee

friendliness, beverage taste and speed of service (Businessweek, 2009), which are key

ingredients towards the success of the brand.

However, despite the improved results, there is not much that would suggest that Starbucks

has succeeded in its quest for market leadership. Market expansion, improved product

quality, increased sales and display of social responsibility may be alright, but there may be

more that needs to be done in terms of change strategy, considering the industry that


Starbucks is in, the kind of competitive forces at play and the brand that Starbucks would

ideally want to build.

RECOMMENDED STRATEGY:

Innovation:

When it is a market that has scope for differentiation rather than one that involves price

wares, the change strategy should focus more on innovation than on expansion. Management

innovation, according to Michelman (2007), “is anything that substantially alters the way in

which the work of management is carried out, or significantly modifies customary

organisational forms, and, by doing so, advances organisational goals.”

With a focus on innovation, there should be little demarcation as in the case of departments,

given that innovation is powered by cross-functional teams – innovations that could bring

about lasting change in the organisation and are capable of effecting new business models

(Maddock and Viton, 2009). As the authors claim, “What some companies call departments

and partners are too often emblems of inefficiency”.

This could be contrasted with the organisational structure of Starbucks. Being a multi-

national firm and one that is brand conscious, Starbucks operates through its own stores or

through licensed stores – and every one of these stores have to strictly adhere to the standards

set by the corporate office at Seattle. Though Starbucks has taken initiatives at structural

changes, they have more to do with managing the behemoth poised towards a global strategy


(Yahoo, 2012), realigning the retail businesses into three regional groupings, it may not mean

much in terms of innovation.

Further, innovation has to be “outside-in” (Maddock and Viton, 2009). That is, it would be

harder for someone inside the organisation to be outstandingly innovative, when people in the

organisation have got so used to the systems, processes and culture of the organisation. The

idea is to stress on learning instead on complying. There have to be questions and challenges

to the status quo so that new ideas are borne out of thinking and innovation. A culture of

compliance would only go against the principles of innovation.

The problem with the current strategy is that it stresses on global expansion through an

organisational structure that emphasizes on compliance. The hierarchy in Starbucks flows

from top to bottom in ways that authority is delegated and flows downwards, which is only to

be expected as the normal way of doing things in an organisation so large and still expanding.

However, expansion should not be at the cost of innovation. It would be déjà vu for

Starbucks, when the organisation expanded ruthlessly, only to realize that margins were

shrinking and costs were burgeoning, resulting in a rollback of the expansion drive, ending

up in urgent cost-cutting measures, closing stores and getting back to focusing on the basics.

There are such warning signs already down the horizon – some of the principle driving forces

of the Starbucks machinery, such as the ‘third place’ ideology, may be compromised in an

overzealous urge to expand and establish in a global market, as is being perceived of

Starbucks in Pakistan. Its reported emphasize on ‘traffic management’ by substituting

spacious sofas with narrower chairs and bringing in subtle changes to the ambience may send

mixed signals to the avid observer, pitting its image against its own brand (Khalid, 2012).


Organisation Transformation and Leadership:

There are two sets of factors involved in organisational transformation – Explicit factors that

include Leader’s action, organisation strategies and organisation structures, and implicit

factors, which would be organisation values, organisation culture and organisation member

spirituality (Min and Santhapparaj, P. 216); and leader’s action proves to be the most

significant factor involved in organisational transformation (Min and Santhapparaj, P. 215).

While organisational change has to start with the leadership, the influence of the leader is at

its weakest point in the initial period after the leader has taken charge, since it takes time for

the leader to build credibility in the organisation, a key factor involved in influencing

followers (Min and Santhapparaj, P. 220)

The only way that Starbucks could stay ahead of the pack and take the lead in the business is

by focussing on innovation and resting the responsibility of change on leadership. While

innovation in the organisation could be brought about by decimating departments and

differences within the organisation, it would not serve the purpose if the organisational

hierarchy remained what it is and leadership did not infuse fresh energy into the business,

promoting an environment of change rather than compliance. The organisational hierarchy

has to be a flat one that is capable of communicating the organisational goals and values

across to the workforce.

If innovation is finalised upon as the key to success, there are three key principles to the art

of organisational change, as suggested by Johnson (2000). The reasons why change is

necessary should be clarified beyond any doubt and in a compelling fashion, people should


be well informed of the need for change, and the change has to be measured and rewarded

adequately.

Branding and Positioning:

The increased emphasis on opening of a number of stores around the world is a clear sign

that the organisation is in a hurry in its path towards accelerated growth. However, as has

been discussed in the initial session of Industry Analysis using the Five Forces Model,

speciality coffee is not an industry that is highly price elastic; nor is speciality coffee an

industry that would fight it out in the market through price wars. With people being price

insensitive when it comes to the ‘experience’ rather than the ‘commodity’, with entry barriers

in the speciality coffee industry being high, unlike any other coffee vendor who would sell a

product and not the experience, and with competition being hot on the tails, it takes a strategy

with a difference rather than one that takes competition head-on, to succeed in the market.

While innovation could lead to any solution in terms of product, price, place, distribution and

supply chain management, branding should reflect the core emphasis on innovation. An

organisation that focuses on the experience seems to be taking a mass market approach that

would be befitting to a commodity manufacturer. Rather, expansion should be compromised

for the sake of value addition, and efforts should be on to construct entry barriers that would

bar competition and new entrants from entering into the market. There is a risk of Starbucks

catering to the generic sector in its quest for market share, one that has to be checked and the

right product positioning, pursued.


CONCLUSION:

The efforts taken by Starbucks at strategic change are welcome in the light of the problems

that the company had run into, and with reference to the issues caused by the economic

slowdown in an era of increased competition. However, the changes may have been good

enough to address the contingencies, but may not go long enough to steer the organisation in

the right track over the long term. The ideal strategy for Starbucks would not be to rack up

the volumes and grab market share, but would be to differentiate its product offerings in the

market through innovation and by carefully selecting its target market, positioning its product

offerings and enhancing its brand image. For this, the company would have to go in for

structural change, foster a culture of change and innovation, and create entry barriers in the

industry to keep competitors at bay through careful branding and market positioning.


REFERENCE/ BIBLIOGRAPHY

http://tutor2u.net/business/strategy/ge_matrix.htm

http://www.valuebasedmanagement.net/methods_ge_mckinsey.html

http://www.quickmba.com/strategy/matrix/ge-mckinsey/

http://www.mrdashboard.com/GE_Matrix.html

http://www.12manage.com/

http://www.kevinlanekeller.nl/

www.starbucks.com\

SEARCH ENGINE:

https://www.google.co.in/

http://tutor2u.net/business/strategy/ge_matrix.htm

http://www.valuebasedmanagement.net/methods_ge_mckinsey.html

http://www.quickmba.com/strategy/matrix/ge-mckinsey/

http://www.mrdashboard.com/GE_Matrix.html

http://www.12manage.com/

http://www.kevinlanekeller.nl/

http://www.starbucks.com/

https://www.google.co.in/

ge9 cell matrix (2)

Business

industry sector attractiveness

market size

bcg matrix

matrixthe matrix

industry profitability

particular industry

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