Now that I have a Double shot espresso firmly in my hand, I can get back to business. So let’s get to it! As my previous posts show, there are potential customers for Starbucks in Finland, but what is Starbucks actually offering these customers (besides great coffee of course)? To dig deeper in the issue I decided to use the help of my good old friend Mike Porter and conduct a value chain analysis. I found this quote by Mike, I think it sounds cool:
“Competitive value is being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.”
- Michael E.Porter3
So, according to Mike, a company can acquire a competitive advantage by analyzing and optimizing its value chain. The value chain is a system of interdependent activities connected by linkages. It is embedded in the company’s larger streams of activities, which are connected in linkages when one activity affects the effectiveness or costs of the other activities.
Companies can attain competitive advantage when the value chain is optimized by coordinating these activities to create greater than is the cost of performing the value chain activities. Optimization allows increasing the amount of value produced without increasing the costs of the firm.
Mike’s value chain model consists of primary activities, which include creation, delivery and marketing of the products as well as after sale support, and secondary activities that support the primary activities. These include Infrastructure, HRM, technology and procurement. According to Mike it is not enough for a company to maximize its operational efficiency. Companies also need to analyze the value they provide to customers and maximize the value provided for the cost. Their value proposition should be located on the productivity frontier, and to remain competitive firms must constantly push productivity frontier forward. Moreover, Mike writes that to outperform competition, a company must establish a sustainable difference between its value offering those of competition.
I will analyze Starbucks’ value chain activities and their unique value proposition in the context of the Finnish market. Starbucks has positioned itself as a provider of ethical premium coffee products and pleasant, luxurious meeting place for people. As such, its prices are rather high and it rather competes with a unique value proposition.
Commitment to best quality and high ethical standards are evident in every step of the value chain, from bean procurement to service.
Starbucks’ value chain starts with product development. The firm is always looking to improve and provide the highest tasting products. This has even caused problems. In 1989 customers were asking for nonfat milk in cappuccinos and lattes. However, the company was slow to respond as product testing revealed that nonfat product had inferior taste. This caused some of the more fanatical managers to try to prevent the perceived dilution of product quality. 1,4
Starbucks pays over the market price for its beans in order to procure premium beans. Besides acquiring highest quality coffee, the ethics of paying a fair price for coffee producers, most of whom are very low income farmers, provides an ethical aspect to the value proposition. Starbucks is one of the coffee chains selling fair trade coffee. Though most of Starbucks coffee is not fair trade it claims to assist the farmers in other ways.
In 1991, Starbucks started funding CARE, a global relief and development foundation, as a way to give back to coffee-origin countries. By 1995, it was CARE’s largest corporate donor with more than $100,000 a year in donations. The donations helped with projects like clean-water systems, health and sanitation training, and literacy efforts. Over the years Starbucks has contributed more than $1.8 million to CARE.29 Despite critique, Starbucks has maintained an ethical image. 5, 6, 7
Unlike most coffee sellers, Starbucks buys its coffee directly from growers. After this the beans are roasted and blended by Starbucks trained personnel and sent out in specifically designed containers to preserve their freshness. All this allows Starbucks to serve coffee that is of superior quality compared to competitors.8
The unique value proposition of Starbucks is best described by Howard Schultz himself:
“The idea was to create a chain of coffeehouses that would become America’s “third place.” At the time, most Americans had two places in their lives – home and work. But I believed that people needed another place, a place where they could go to relax and enjoy others, or just be by themselves. I envisioned a place that would be separate from home or work, a place that would mean different things to different people,”9
Schultz was inspired by the bustling Italian coffee shops in which people gathered to meet, to spend time and just relax. Starbucks was modeled to bring this aspect of Italian culture to the US and later to the world. Starbucks stores aim to be a part of the community, to be a meeting place and a central hub in which people come to spend time and money. Starbucks does this both by providing a very pleasant environment in which people can spend time. Every little detail is taken into account. Starbucks has even covered its foods and started to grind the beans in stores to maintain the atmospheric scent of coffee. To support this meeting place dynamic Starbucks stores are typically placed in central locations in the city. 2, 4, 9, 10
Starbucks’ marketing is designed for strengthening the relationship between the customer and her barista. The marketing is also focused not on the traditional TV advertisements but it does buy the occasional advertisement for new products. It instead focuses on events and community involvement. Some of the events can be very flashy, an example of which is a New York party with the Miss Universe mixing drinks. 11,12,13,14
Value proposition in Finland
As you already know, Finnish people drink more coffee than any other people in the world. Finland also has a per capita high income and lacks the coffee shop culture present in many other countries. Finland is also highly connected with the world and Starbucks and the Italian coffee shop culture it is based on are familiar to a large amount of Finns.
All this suggests that there is a market for a premium coffee chain and Starbucks specifically. Finnish people are used to drinking coffee and the superior quality of Starbucks coffee should attract a following of loyal fans (like me!) very fast. Though good coffee is available in many competing coffee shops none of them have a quality similar product selections or the logistical system of providing superior ingredients.
As an atmospheric place to gather and meet people Starbucks would probably be compared not only to the existing coffee shops, but also bars (in addition to coffee, we Finns also like our booze). In both of these cases I believe that Starbucks has a unique value proposition. Bars are louder, alcohol soaked environments and many people would rather meet people and spend time in calmer environment with less alcohol in the mix. Coffee shops provide more competition, but again, are not as meticulous as Starbucks is.
Love and hugs, Kosti
2. Velta, M. 2008, ‘How to Reenergize Starbucks’, BusinessWeek http://www.businessweek.com/innovate/content/feb2008/id20080220_372003.htm, Accessed 2.2.12
3. Michael E.Porter, 1996, What is Strategy, HBR 1996 Nov-Dec
4. Starbucks Corporation case study, McGraw-Hill Companies 1997 http://www.mhhe.com/business/management/thompson/11e/case/starbucks-1.html, Accessed 3.2.12
5. Fairtrade beans do not mean a cup of coffee is entirely ethical, The Guardian, Feb 28, 2011 http://www.guardian.co.uk/environment/green-living-blog/2011/feb/28/coffee-chains-ethical, Accessed 3.2.12
6. Oxfam versus Starbucks, The Economist, 2006, http://www.economist.com/node/8129387 , Accessed 3.2.12
7. Starbucks Corporate Social responsibility report, 2001 http://www.starbucks.com/assets/csr-fy01-ar.pdf, Accessed 3.2.12
8. Nancy F. Koehn, 2004, Howard Schultz and Starbucks Coffee Company, Harvard Business School Entrepreneurship Cases, http://skellogg.sdsmt.edu/IE355/Supplement/howars_s.pdf, Accessed 3.2.12
9. Youngme Moon and John Quelch, 2003, Starbucks: Delivering Customer Service, Harvard Business School, http://www.imscorporate.com/executiveprogram/pdf/starbucks.pdf, Accessed 3.2.12
10. http://www.starbucks.com/responsibility/learn-more/goals-and-progress/community-involvement, Accessed 3.2.12
11. Melissa Allison, 2006, Starbucks takes unique approach to marketing, Seattle times, http://seattletimes.nwsource.com/html/businesstechnology/2003300353_events12.html , Accessed 3.2.12
12. Mikal Belicove, 2010, How Starbucks Builds Meaningful Customer Engagement via Social Media, http://www.openforum.com/idea-hub/topics/marketing/article/how-starbucks-builds-meaningful-customer-engagement-via-social-media-mikal-belicove
13. Starbucks Marketing Strategy Unconventionally Effective, Vote For US, http://www.voteforus.com/starbucksmarketingstrategy.html
14. Emily Bryson York, 2009, Starbucks Marketing Push for Via Begins With Taste Tests, Advertising Age, http://adage.com/article/news/advertising-starbucks-begins-marketing-push/139319/