Skip to main content

5 - VRIO - Starbucks

In this article we will look at the Resource Based View on Starbucks, which means we will evaluate the unique resources held by Starbucks, giving it competitive advantage over competitors and discourage new entrants. Resource Based Analysis depends on two big assumptions:

  1. Bundles of Productive Resources: A firm has bundle of resources at their disposal to operate competitively in the market.
  2. Elasticity of those Bundles: How difficult or easy it is to get those resources.

Broadly these resources further can be divided into four Categories:

  1. Financial Capital: Starbucks is competitively cash rich than their competitors. Their current market cap. stands at $99.31 Billion and earned $26.509 Billion in revenue and bagged net income of $3.599 Billion in FY 2019. https://stockanalysis.com/stocks/sbux/financials/balance-sheet/
  2. Physical Capital: Starbucks is expanding globally. They already have 31,180 stores globally of which 51% are company operated and 49% are licensed. Majority, 61%, of all global stores are in US (15,243) and China (4,447).  SBUX Financial Statement. Apart from this Starbucks has plans to open a new hi-tech roasting facility in China which will be able to serve 6000 stores. At this scale competing with Starbucks for Coffee market would be really hard and discourage new entrants. 
  3. Human Capital: Starbucks has an impressive Human Capital, stands at 346,000 in 2019. (Link). Starbucks not just hire talent but they also groom them and invest heavily by providing career paths and trainings. (Learning and Development programs). This helps Starbucks retain trained employees. Starbucks also has a really good barista training program, where they teach about tasting, brewing, flavors, and textures. (Video Link)
  4. Organizational Capital: Starbucks leadership is listed. (Link)

VRIO is the framework developed around two assumption and resources. VRIO is abbreviated for four questions we ask about the business activities:
  1. Question of Value (V): This question seeks answer for firm's ability to use resources and capabilities to exploit or neutralize threats. Starbucks has utilized resources to keep its competitors at disadvantage and also neutralized threats. Starbucks invested in farming and helped farmers to grow good quality beans and received multi year contracts for preferred access. Starbucks also optimized its supply chain operations and reduced the cost (Link). By keeping track of customer taste preferences and feedbacks, Starbucks also optimized the roasting process to the level where it serves the taste preferred by millions (Link). They opened 5 hi-tech facilities for roasting to achieve the scale benefits (Link). All these improvements over the years made Starbucks pioneer in many operations related to Coffee harvesting, to roasting, to brewing and serving in a cup to the customer at a place filled with Coffee Aroma with Smile.
  2. Question of Rarity (R): There is nothing rare about brewing coffee, but Starbucks invested heavily in mastering the taste and ambiance. Customer experience served with Coffee is what makes Starbucks different than others. If one customer want a small break, or want to have small conversation, most if the time in US, place of choice is Starbucks. This is rare Starbucks brand value. Apart from that, Starbucks also has rare advantage in access to high quality Arabia beans. Starbucks achieved this by helping farmers financially and provide hi-tech information generated from its Research & Development efforts.
  3. Question of Imitability (I): Brewing Coffee might not be that hard. Someone can open a coffee store and provide same quality of product and services, but replicating this at Starbucks scale is not an easy task. Combining all the operations mastered by Starbucks over the years give it competitive advantage over others in terms of cost and brand-value. For e.g. McDonalds compete with Starbucks on price and speed, Peets Offers niche-high quality coffee, Dunkin offers Coffee with many food items, but none of them come close when it comes to coffee with consistent product and service quality at the scale. Even substitutes such as energy and cold-drinks are not being able to give it tough competition because of health related issues arises from sugar used heavily in theses drinks. Even Starbucks has its own Cold Coffee Frappuccino brand sold in bottles all over US. 
  4. Question of Organization (O): Although considered secondary in nature, reporting structure, compensation policies, incentives, and other internal control structures provides valuable competitive advantages. Although the market provides almost equally to opportunities to competing firms, but the one's with less bureaucracy and fast to respond to market conditions succeed in materializing those opportunities. Appraisals tied to long term goals, and innovation paid off in long run. This timeline provided by Starbucks gives a glimpse about the internal structures and readiness to seize the opportunities in timely manner. (Link)

In summary, it may seem that Starbucks is just a Coffee store, but is is really difficult to imitate the consistency, quality, taste, service, and operations at this level. Starbucks also have first mover advantage in many aspects, such as large scale roasting, favorable store locations, history, brand-value, and perfection to taste of million of people. Green bean harvesting to serving in a cup at a store is quite a journey and Starbucks knows exactly how it is done.  




Comments

Post a Comment

Popular posts from this blog

15 - Starbucks International Strategy

Starbucks mostly wants to own its own stores for best experience and it has done that successfully in US. Although drinking coffee in bar was not famous when Starbucks was started in 1970's. Howard Schultz inspired from this idea in Italy, started serving brewed coffee in US. He was an American Businessman and understood the economics, work, and local cultures of US, so was likely aware of the risks and opportunities of the time. He made Starbucks a success story in US and now we can find Starbucks stores in almost all the major and even small US cities.  But replicating same success would not that be easy. It would need lot of capital, cultural experiences, macro and micro economic indicators, and specifically language and accent. Some of these things can be replicated using the local hires, but creating a success at the level Starbucks would want to would not be easy without local partnerships and alliances. Starbucks heavily relied on license model for half of its stores and als...
Post a Comment
Read more

14 - Starbucks Acuiqsitions

Starbucks acquired many companies over the years. Let’s look at these acquisitions strategies employed by Starbucks.  Teavana • Type of business: Tea and Accessories • Acquisition price: $620 million • Date purchased: December 31, 2012 Starbucks acquired Teavana as Product Extension Merger and started offering loose leaf tea and tea related products in its stores and online. Although this acquisition gave Starbucks 379 new locations, but Starbucks closed them all instead.  La Boulange • Type of business: Bakery Chain • Acquisition price: Reported $100 million • Date purchased: June 4, 2012 This is mix of Vertical Integration and Product Extension acquisition. Since Starbucks started selling bakery products in its stores as Product Diversification strategy, it was sourcing these bakery products from La Boulange. Later Starbucks decided to acquire La Boulange to vertically integrate its operations and kept 400 locations came with this acquisition. Later Starbucks dec...
Post a Comment
Read more

3 - Mr. Porter Coffee Please

1. Threat of Entry             a. Economies of Scale: Starbucks currently have 5 roasting facilities and opening a new one in China, which will be biggest so far and will serve approx. 6000 Starbucks in China itself. At this scale, it is very hard for any new entrant to compete with Starbucks on cost. https://u.osu.edu/commoditychaincoffee/manufacturing-page/ https://stories.starbucks.com/stories/2020/starbucks-announces-new-roasting-facility-in-china-extending-its-global-roasting-network/             b. Product Differentiation: Starbucks not only buys best coffee beans out there but also help them grow. They always use Arabic Coffee beans, which are considered best in quality for dark roasting and never mixed them any other type to cut down the cost and increase profit. “Starbucks Arabica beans are different from regular Arabica beans. At every step, we go to grea...
Post a Comment
Read more