a report on starbucks broad differentiation strategy

ABSTRACT As known as a famous coffee brand in the world, Starbucks has entered Vietnam with the purpose to concrete this potential market.. Introduction Starbucks is a world-famous coffe

HANOI UNIVERISTY

FACULTY OF MANAGEMENT AND TOURISM

A REPORT ON STARBUCKS’ BROAD DIFFERENTIATION STRATEGY

Course: Strategic Management Tutor: Do Minh Ngoc Students: Nguyen Duc Thi Ha - 1504040035 Cao Huong Ly - 1506090048 Nguyen Thao Phuong - 1506090063

Do Thi Trang - 1506090079 Date: May 18", 2018

ABSTRACT

As known as a famous coffee brand in the world, Starbucks has entered Vietnam with the purpose to concrete this potential market With distinct cultural values and external forces, Starbucks has to find its own way to fit and to compete with other coffee chains and traditional café as well Moreover, by utilizing its internal strengths and opportunities, Starbucks has positioned itself in the customers’ mind and in this report we will analyze all factors that affect to the operation of Starbuck Giving a closer look into its activities and a broader view in order to evaluate whether its strategies fit with Vietnam market or not Finally, some recommendations will be given to improve its weaknesses in strategic decision making It is hoped that this empirical report could be a useful reference for later research about Starbucks

TABLE OF CONTENTS ABSTRACT

1 Introduction

2 Literature review

3.1 Economic

3.2 Demographic

3.3 Political

3.4 Sociocultural

3.5 Technological

3.6 Physical environment

4, Internal Analysis

4.1.1 Inbound logistics

4.1.2 Operations

4.1.3 Outbound logistics

4.1.5 Service

4.2 Support Activities

4.2.1 Firm infrastructure

4.2.2 Human resources

4.3 VRIO Analysis of Starbucks Corporation

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6 Recommendation

REFERENCES

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1 Introduction

Starbucks is a world-famous coffee brand and the typical case study applying broad differentiation strategy From a small store in Seattle in 1971, Starbucks has expanded to28,000 stores in 76 countries In spite of the rapid development, it still maintains the commitment to the quality of the product and brings the best benefits to employees Also, we cannot deny that the strategy has played an important part in forming this success We will introduce to you basic information of Starbucks in general and in Vietnam to help you understand more about the Corporation Firstly, about the logo, although the logo design has been changed many times over time with the speedy popularity of Starbucks, the original image of “Mermaid”, or siren is still always in there Starbucks founders consider the logo as a tool to lure coffee lovers and make them sink in Starbucks Island like the way sirens entice sailors to jump into the sea in Greek mythology

TM After 5 years of operation in Vietnam, Starbucks recently has 35 stores in HCM City, Hanoi, Da Nang and Hai Phong In Vietnam, Starbucks is competing intensively with other well-known coffee brands such as The Coffee House, Phuc Long, Trung Nguyen Legend, and Highlands Coffee in the coffee retailing industry in Vietnam As defined in the Starbucks Values, one of Starbucks guiding principles is creating a culture of warmth and belonging, “where everyone is welcome” Nevertheless, in Vietnam, adults (from 25-40) and young people (from 18-24) are two main objects that account for 90% of the revenue in 2017 (Tran, 2017) Additionally, this firm has the great diversity of products in coffee, fruit drinks and sandwiches Starbucks always have the highest price in Vietnam, popular from 85,000 to 100,000 per cup of coffee During recent time, the performance of Starbucks in Vietnam has still grown well although food and beverage

sector is more and more competitive In this report, our group will analyze the internal and external environment of Starbucks in Vietnam and also give the assessment about the broad differentiation strategy of the company in Vietnam market

2 Literature review

In this report, we use value chain model to analyze the internal environment and analyze the extemal environment through seven segments: demographic, economic, political/legal, sociocultural, technological, global, and physical Value chain analysis shows which part of the operations of the firm values and which one does not The value chain is divided into primary and support activities Primary activities are related to the physical creation of the product, sale and distribution, and service after the sale On the other hand, support activities support for the primary activities to perform well such as human resource management and firm infrastructure Therefore, the value chain shows how the firm turns the raw material into the product, and then sell, distribute, and service it to customers to create value To become a competitive rival, the firm has to have activities which make superior value and the value-creating actions which competitors cannot take However, analyzing the value chain and creating additional value without incurring costs is not straightforward By contrast, analyzing the general environment through seven segments is to help the enterprise recognize opportunities and threats to cope with uncertainty in the external environment The demographic segment is studied on a global basis about population size, age structure, geographic distribution, etc The economic segment represents the direction of the economy which the firm wants to compete It is related to inflation rates, interest rates or budget deficits or surpluses while the political/legal segment refers to how government and the firm try to influence each other for issues such as antitrust laws, taxation laws or educational philosophies and policies In addition, the sociocultural segment shows the attitudes and culture of the society such as diversity attitudes about the quality of work life, shifts

in product and service preference characteristics, etc However, technological segment focuses

on the change of technology through new products, for example, new communication technology

or applications of knowledge Besides, the global segment refers to relevant new global markets

or critical international political events And the last one includes changes in the physical environment of the world such as energy consumption, renewable energy efforts or producing environmentally friendly products

3 External environment analysis

3.1 Economic

With the stable economy and the strong growth potential, Vietnam now an attractive market for a significant number of businesses In particular, Vietnam has the GDP growth of 6.8 %, which exceed the target growth in 2017 Moreover, the purchase power parity increases every year is significant with 30 to 40 billion higher, stable with 6% increase annually (CIA, 2018) Consequently, it is understandable when people come to chain coffee store such as Starbuck, Highlands Coffee, are willing to spend from 40000VND and higher (2016) Hence, Vietnam also considered as one of the most dynamic and interest market in Asia by Starbucks when the scan and assess the country (2015) In addition, as the world second-largest coffee producer of the world, Starbucks aware that they will face numerous competition from the host market 3.2 Demographic

With a high population density and mostly focus in the Mekong Delta in the south and the Red river valley in the north, 8.6 million and 7.6 million respectively (GSO, 2017) The population is young with more than 45% of which is in the range of 25 to 54 suitable and attractive market for such business like Starbucks (CIA) Also, people from 15 to 24 years old account for more than 16% of the population, show a huge potential in both laboring and customers (Marques) However, the raise in the population along with the international integration trend make the operational and labor cost of Vietnam cheaper than other countries, create an attractive opportunity for Starbucks With the GDP shows the substantial raise in the income (from 3.2 million in 2010 to 5.9 million in 2016) and the globalization, people are urged to seek for international brands, or businesses that famous, hence eliminate the hesitation in their spending decision (CEIC, 2017)

3.3 Political

The open policies with the encouragement from the government to the foreign investments create significant opportunities for Starbucks to enter the market Policies about reducing taxes, encourage foreign investments, create a competitive and attractive environment for international businesses have been applied since Vietnam became a member of APEC, TPP, despite the fact that later on the US withdrew from the TPP Hence, tariff reduction, antitrust law, labor law, etc are obviously a positive sign for Starbucks entering Vietnam market (HA.NV)

3.4, Sociocultural

Societies’ attitude and cultural values appear to be very important in Vietnam more than ever since the population now have higher level of education, the Government spent 5.7% of the GDP

to education, one of the most concerned sector of the nation (CIA, 2018) People awareness about health as well as food hygiene and safety also factors affect to the choice of coffee bean which origin from southern Vietnam Besides, with over 30% of the population working in the service industry, a significant shift from agriculture industry, will become an advantage for Starbucks Another manifestation of changing working style is the growth of contingency workers which include part-time, contemporary or contract employees, which may result in the reduction of labor cost for Starbucks (Linh) Particularly, Vietnamese’s behaviors in drinking coffee changes throughout times: before, people will spend time to enjoy a quality cup of coffee, now, due to the fast pace of life, time spend waiting a coffee is lessened However, people still demand a coffee with good taste as the old time but it normally should go along with nice location, decoration, wi-fi connection, brand, and other supplementary services (Duc Anh) 3.2 Technological

Given the rapid change in technology presently and the industry 4.0, it is crucial for firm to fully understand its importance and effectively implement the technology segment By utilizing the convenience of mobile phone and its wave in consumers, Starbucks, in partnership with Apple, has bring app based discount coupons and other apps that help consumer to order and pay online (Thoa) As a result, applying this technology to Vietnam in the future is totally possible Also, Starbucks introduced Wi-Fi capabilities in its outlets, allow customers to easily access to the world, which may not necessary a distinct idea but very essential nowadays

3.6 Physical environment

Due to the increase concern about the quality of the physical environment, that its changes may result in the effectiveness of the business, a number of companies have and are planning policies that friendly to the environment Starbucks is using coffee bean of the center and southern part of Vietnam and in order to ensure both the quality and quantity of the coffee bean, Starbucks has to care about the environmental impacts such as the weather changing or water shortage in dry season

3.7 Rival analysis

Despite the famous of international brand like Starbucks, there are one domestic brand that gain

an extensive support of Vietnamese in the south — Phuc Long Coffee First appeared in 1957 but

not until recently that Phuc Long extent its coffee chain with an impressive number of stores throughout Ho Chi Minh City (more than 15 stores up to the moment) With the high quality of the coffee, along with various product from tea, juice, breakfast, etc and their competitive advantage is that the price is quite lower compare to other brand such as Starbucks Hence, Phuc Long can be considered as the biggest competitor of Starbucks in the south Vietnam In addition, Phuc Long also aim to the businessman, the middle class and middle upper class, which partly is the target segments of Starbucks However, since Starbucks mostly aims to middle upper class to high class, it is reasonable to say they compete in term of market share (Y)

Moreover, Phuc Long has the logo design with green and white, pretty similar to Starbucks, therefore, to some extent, can be considered as a strategy toward Starbucks Any place that Starbucks appear, will be one or sometime two stores of Phuc Long nearby, such as the area of New World Hotel, District 1, HCMC About pricing strategy, Phuc Long utilize its advantage of coffee bean that planted in Lam Dong, one of the most famous places in planting coffee, their price of an espresso is around 28000 — 35000 VND, one third lower than that of Starbucks, whose price for an espresso is from 35000 to 50000 VND Also, at the moment Phuc Long locates mostly in the south Vietnam, what will happen to Starbuck if they extent the market to the north, where the competitive not yet intensively? Starbuck will have to consider this if they want to compete against Phuc Long as well

Another strategy of Phuc Long is that they developed Take away house with upgraded services: more luxury design together with higher price, but most important is that now they target at higher class of customers They invest for “expensive” location near Starbucks but with cheaper price Given Starbucks a question of how to gain back customers?

Another rival that Starbuck needs to be aware of in the other side of the country is Highland Coffee — a long history brand in Vietnam After the acquisition by Jollibee in 2012, Highlands coffee had shown a clearer move in proving its position in the Northern market Firstly, Highlands coffee owns a large number of stores in Hanoi with superb location: nearly 200 stores

in both Hanoi and Saigon compare to almost 30 stores of Starbuck More specifically, before they targeted at business class and with good-view locations, showcasing the luxury, high-class service, now they “standardize” the menu with variety drinks and acceptable price in the purpose

of reaching to various type of customers This create some differences in target customer of Highlands and Starbucks, but overall, Highlands Coffee still a big competitor of Starbucks

Moreover, with reasonable price (cheaper than most of Starbucks’s drinks), traditional decoration and values that Highlands is now try to bring to customers and good locations in nearly every big shopping center, malls, supermarkets, Highlands makes itself convenience for office employees, businessman, tourists, and other classes Since the purpose of coming to a café nowadays is to have a space to work, to meet friends or meet business partners, Highlands Coffee is providing excellent place to meet the needs (Ngoc Anh, 2017)

Also, it likely to see that in the future, Highlands will keep expanding its chain The latest example can be seen in Hanoi is the new Highland Coffee store has been opened in the first floor

of Machino shopping center, which also built and opened recently, in Tran Phu, Ha Dong With this strategy, Highlands will gain more and more market share and it will be hard for Starbucks

to compete against it

All in all, facing such a strong competitor, Starbucks needs to make use of their competitive advantages, which will be discussed in the next part, since internal environment in what they can control but external environment

4, Internal Analysis

Support Activities | /~<——— -

Customers

Activities Primary Logistics Inbound Operations Outbound Logistics Marketing and Sales Services

Starbucks Value chain analysis

4.1 Primary activities