Starbucks Pestle Analysis

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Starbucks Corporation is widely known for its excellent coffee made from berries sourced around the world. The company has a strong organizational culture built around its mission and vision. Since its inception, the firm has developed a set of assumptions, values, and artifacts that create a sense of uniqueness. In the analysis, the paper carries out a PESTLE analysis of Starbucks Coffee by evaluating the political, economic, legal, social, technological and environmental factors in Starbucks’ macro environment. Being the largest coffee chains worldwide, the corporation utilizes its corporation structure to promote its development.  Besides, the organization has an efficient corporate structure that has improved business operations. The structure encompasses functional hierarchy, teams, geographic and function-based divisions. The political factors affecting Starbucks’ operations include regional integration, political instability, and the bureaucratic tape. The economic factors include the inflation rates, change in import rates and high growth in developing countries. The primary social factors include the increasing population and cultural trends. Technological factors discussed include the agricultural and biotechnological developments, the mobile app, and the use of the Starbucks card. The legal factors evaluated include local licenses, trade laws, and health policies. Finally, the paper evaluates environmental factors such as global warming, climatic changes, recycling and the use of fuel-efficient equipment. The paper elaborates on these factors by describing how they affect Starbucks and the various strategies the company has taken to address the threats and opportunities. The paper also identifies and evaluates Starbucks’ responses to these factors. Finally, it issues some recommendations under each category that the firm can adopt to strengthen their strategies and dominance in the market.

Starbucks PESTLE Analysis

Introduction

Starbucks is one of the largest coffee-house chains globally. The company was founded in 1971 by three friend, Gordon Bowker, Jerry Baldwin, and Zev Siegel at Seattle. The initial aim of the company was to sell freshly roasted coffee beans, focusing entirely on selling high-quality coffee beans as well as equipment. However, Howard Schultz bought the organization in 1987 at 3.8 million dollars and introduced the café concept and additional sales of beans as well as other items in the stores (Rothaermel, 2017). After acquiring the firm, Schultz immediately began the transformation of the firm from roasting coffee beans to the current beverage retailer found in many parts of the world. This expansion of the business saw the company grow tremendously. By 1992, the company went public and introduced its operations in several countries around the world with over 20,000 stores by the 21st century. The business operates over 25,000 locations globally as of 2016 (Rothaermel, 2017). Schultz has overseen the company’s expansion and transformation refocused on core values and reignited coffee innovation and passion. As shown in exhibit 2, to fuel international and domestic store growth, Starbucks not only used its IPO funding but also a more diverse menu to serve its broad range of customers. Its mission emphasizes nurturing and inspiring the human spirit to influence the company’s strategic management in developing and growing business.

Being the largest coffee chains worldwide, the organization utilizes its corporation structure to promote its development. Starbucks operates under a matrix organizational structure which is basically a hybrid intersection of various characteristics of basic organizational structures. Teams, product-based divisions, functional hierarchy, and geographic divisions are the primary features of the organizational structure of Starbuck (Starbucks Coffee Company, 2015). With functional hierarchy, the company structure is grouped on the basis of business function such as the marketing, finance and HR departments. The functional hierarchy facilitates top-down monitoring and control with the chief executive as the head. Geographical divisions are based on the physical locations of business operations. The major three regional divisions of Starbucks are as listed: 1) America 2) Asia-Pacific and China 3) Africa, Middle East, and Europe (Rothaermel, 2017). The local managers report to the senior executives within each of the geographical division, hence there is closer managerial support. The product-based divisions address the product lines and enable the company to focus on the development of products. Finally, teams are valuable and visible at the lowest corporate levels to promote efficient delivery of goods and services to consumers. This paper explores Starbuck’s current approach to managing environmental drivers in their market. It identifies and analyses the impact of macroenvironmental drivers on the organisation and offers managerial recommendations on their responses based on the analysis.

PESTLE Analysis

The significance of PESTLE analysis

PESTLE is a business analysis tool utilized to make a thorough and systematic evaluation of a business. The process presents decision-makers with better understanding and awareness of the changes occurring or which may occur as a result of influence from the external environment and the effect of these changes to the business (Gillespie, 2007). The tool helps evaluate political, economic, social, technological, legal and environmental factors (Yuksel, 2012). By identifying the significant changes within these landscapes, Starbucks will understand the critical influences in the external environment and their effect on the future of the business. The tool will help identify to what extent governments influence Starbucks by focusing on factors such as trade tariffs, fiscal policy, and tax policies. It will also evaluate the economic factors with resonating long-term impact on Starbucks such as the interest rates, inflation rates, economic growth patterns, and foreign exchange rates. The social environment will also be evaluated to identify the effect of factors such as demographic trends and cultural trends to Starbucks. Furthermore, the innovations in technology are a critical trend of scrutiny to establish their effect on the operations in the food service industry. The legal analysis also helps take into account the various laws that affect Starbucks such as labour laws, safety standards, and consumer laws. Finally, the environmental analysis will facilitate the analysis of the physical environment and the factors affecting production such as climatic changes.

Political factors

A number of political factors serve as either opportunities or threats to the Starbuck business. For instance, the bureaucratic tape in third world countries is a major threat to the business. Regional integration is a current trend that is presenting a great opportunity for Starbucks’ global expansion. Moreover, the efforts by most governments to improve infrastructure offer the company opportunities to access more markets and suppliers. However, the persistence of the bureaucratic tape in most countries continually makes expansion difficult particularly in developing countries (Smithson, 2017). These countries may also be characterised by political instability, wars, and conflicts that may affect business. For instance, the 2003 declaration of war on Iraq by the US led to a boycott of American goods and services and Starbucks suffered a loss. Moreover, Schultz’s close relationship with the Jewish community and the rumors concerning his sponsorship against the Palestine crisis led to the closure of Starbucks stores following security threats.

Notably, the firm sources its raw materials from different suppliers in different countries hence has continually attracted the attention of these countries with regard to Starbucks’ adherence to environmental and social norms and to the sourcing strategies as stipulated by the Fair Trade practices. Moreover, the corporation faces the need to adhere to regulations and laws in these countries since there is increased activism and political awareness in these countries. Starbucks adopted the Fair Trade practices in 2002 and they continually develop agreements with coffee farmers to promote their business (Mahobia, & Jain, 2015). Besides, Starbucks faces regulatory pressures in the US markets. The reason is due to the greater scrutiny of US-based multinationals particularly their business process. Therefore, they can survive in business and enter new markets if such laws are upheld and adhered to as well as a thorough evaluation of the new markets conducted before entry. 

Economic factors

Various economic changes and conditions are significant to the business. The major economic external factors are the high growth in the developing countries as well as the decrease in the rates of unemployment which create the opportunity for the company to increase its revenues. The company, however, needs to be aware of the changing import laws that may affect the importing. A change in import laws can affect various stages of production and in the end, lead to price changes and reduce consumption levels or sales. Similarly, they need to review the inflation rate which is often increasing and decreasing hence affecting the buying power customers.

An analysis of the company’s revenues against the number of stores from 1971 to 2016 as depicted in Appendix A depicts a positive economic environment. It can be deduced that an increase in the number of stores over the years consequently resulted in an increase in revenues. By 2016, the company registered revenues of $20 billion across 25,000 stores (Rothaermel, 2017). This growth is projected to increase even with the expanding economic opportunities within countries of operations. Nevertheless, the increasing labour costs in the countries of suppliers is a major threat because it implies that Starbucks will spend much more on the raw materials since it sources most of them from developing countries. Notably, the potential risk for a global recession is likely to dent the profitability of the company as that witnessed in 2008 (Latif et al., 2014). With such a potential risk, Starbucks need to consider lower price alternatives for consumers hence create an opportunity to increase profitability. Additionally, the rising labour and operational costs in the macro environment may, in the end, be coupled with decreased profitability, hence Starbucks’ focus on technologies to reduce these costs can result in higher profits.

Social factors

The social environment presents various opportunities to grow the revenues of Starbucks such as increasing health consciousness, growing middle class, and a growing coffee culture. The population is augmenting and the many people with demographics differences love Starbucks coffee. On the other hand, such demographic changes may get accompanied by market dynamics that are difficult to predict hence become problematic to the business (Smithson, 2017). For instance, Starbucks target market is comprised of men and women between 20 and 40 years and they face the risk of being affected by different population structures. A sudden shift in this age group could have a significant effect on the revenues of the business in the long term.  Notably, the Starbuck services most appeal to individuals with a higher income given the company’s high pricing strategy. The firm is therefore likely to be subjected to income elastic demand such that a change in the quality of life may significantly affect the demand of its coffee. To counter such potential loss in the number of sales, Starbucks can offer cheaper and affordable products but it may have to sacrifice the product quality. With new opportunities in the growing number of middle class, Starbucks should expand the consumer base to comprise buyers from both middle and lower income classes (Outtara et al., 2006). Additionally, “ethical chic and green consumers are also fretting about the environmental and social costs of the brands” (Outtara et al., 2006). Starbucks needs to pay attention to this trend since the baby boomers are retiring and the firm may be forced to tap the generation X and the Millennials as their next customers.

Technological factors

The use of innovative and new technologies can lead to the improvement of services at a café. Various biotech and agricultural developments have facilitated the fast growing of coffee plants and minimized labour costs. Starbucks always strive to find the newest technology to offer better customer service. The company has introduced a Starbucks that has attracted more customers and made their visits quicker. Importantly, Starbucks has established an online shop locator to help consumers locate their stores easily. The firm has also begun doing online deliveries of the produced coffee. The customers can also use the Starbucks coffee of their choice since they can buy the coffee packets online at the company’s store or at their shops. The introduction of WIFI to its outlets has enabled customer surf and work while sipping their coffee. Furthermore, by enabling mobile payments through a partnership with Apple, Starbucks is in a better position of enjoying the benefits of the mobile wave (Rothaermel, 2017).

The company’s key success in modernization and innovation as well as other factors as depicted in Appendix B give it an upper hand compared to the main competitors such as McDonald’s, Dunkin Donut and Peet’s Coffee. Some of the major developments include prepaid Starbucks card, WIFI access, card rewards, Starbucks gold card5 and using technology that makes one cup at a time to ensure consistency in taste. Nonetheless, the company needs to continually be aware of changes particularly in biotechnological and agricultural developments to increase their production quantities, meet customer demand and register profitability (Starbucks Coffee company, 2016). Most importantly, they need to acknowledge that a digital strategy is accompanied by very significant challenges. The incidents of hackers accessing bank accounts of customers in 2014 and 2015 showed the loopholes and deficiency in deploying a safe technology. Starbucks needs to, therefore, ensure the privacy of consumer information as well as the encryption of data, otherwise, the company risks losing the pool of customers.

Legal factors

Starbucks does not only sell coffee but also other hot food such as sandwiches, pastries, which implies that there are numerous laws and regulations regarding safety and health standards. The Food and drug administration (FDA) of USA monitors and inspects Starbucks food to ensure they are safe for consumption. However, these guidelines may change with different regions of operation. Starbucks has also ensured it produces healthy foodstuff to its consumers by taking part in 4 inspections annually to gain the permit from the health board to still run the business. The regulations by the board include ensuring high cleanliness standards, issuing of appropriate tools to staff and serving food and drinks that meet the set guidelines (Smithson, 2017). Therefore, Starbucks needs to ensure these laws and regulations are not violated in countries supplying raw materials and the home market. Most importantly, “the company needs to look out for the introduction of policies and regulations related to the production and consumption of caffeine by the health authorities” (Smithson, 2017).

Notably, the fluctuation in trade laws is a growing opportunity for Starbucks. The company imports coffee from nations with suitable environments and climates for its growth. Trade laws are increasingly becoming less restrictive hence the increased imports and improved relationships between buyers and suppliers. On the other hand, laws such as planning permission or local licenses are a hindrance to the company’s expansion. Governments have great influence on a firm’s expansion and one may need to access proper legal permission. For this reason, an understanding of the legal requirements, the regulations, and laws of doing business will help Starbucks make effective strategic decisions when choosing the markets and regions to penetrate.

Environmental factors

Starbucks faces the major environmental factor to be global warming. The company has noticed the frequent change in climate because of the extreme rise in water and sea levels within its markets such as the UK market (Starbucks Coffee Company, 2016). The constant climatic changes have pushed Starbucks to work hard to create its traditional farming resources. Starbucks views water scarcity as a sustainability threat. For this reason, Starbucks has initiated and restored watershed in regions such as the UK by eliminating water to the National Forest System. Therefore, the company has been able to drive more energy and water to fifty percent.

Moreover, the company is putting more efforts to minimize the environmental impact and tackle the climate changes by inspiring others to take a similar step to theirs of partnering with non-governmental organizations. Starbucks’ involvement with NGO’s has enabled them to take part in community involvement, environmental stewardship, and ethical sourcing (Rothaermel, 2017). The company has partnered with the African Wildlife Foundation, International Youth Foundations, Sustainable food lab, and the United States green building coffee to promote environmentally responsible coffee. The company purchases the coffee under the ‘Starbucks Shared Planet’ and as such, they are committed not only to the people but also the planet and as a result, they have introduced the use of reusable cups. The use of biodegradable materials as opposed to plastic has seen the company gain certificates in renewable energy among 500 firms. The corporation also uses the fuel-efficient equipment to reduce the consumption of natural gas (Starbucks Coffee Company, 2015). These strategies to remain a green company are an effective approach and competitive advantage for Starbucks. As a result, the company needs to continually evaluate and monitor its energy consumption and efforts to ensure they conserve the environment. 

Competition

Starbucks faces stiff competition from companies that produce similar products such as Peet’s Coffee and Tea, Dunkin’ Donuts, and Caribou Coffee. The firm is striving to provide its customers with high-quality coffee yet, its competitors are also doing the same. As demonstrated by Rothaermel (2017), the cost of production varies depending on the source of the raw materials used. In this respect, Starbucks has to balance between making a profit and retaining the customers. In some instances, the firm is seen to set high prices for its products thereby reducing affordability. Furthermore, Starbucks is affected by imitation of its products hence lowering the drive for significant growth in the industry.

Starbucks response/actions

Product differentiation is the primary strategy used by Starbucks to gain continuous competitive advantage. According to Shockley, Morreale & Hackman (2016), the company offers differentiators such as prime locations, supreme customer service, coffee beverage reputation, and premium product mix. Starbucks has continuously used these differentiators to establish a highly valued brand which is costly for the competitors to imitate. Similarly, to stand out in the market, the company uses strategy of strategic alliance and making smart acquisitions. Noe et al. (2017) argues that Starbucks does not just follow franchising model and joint ventures in the international markets, but it operates in the company oriented stores. Additionally, it has established some primary acquisitions such as premium bread products, fresh juice products, and tea products. Considering the organization’s acquisition theory, Starbucks has been using product acquisitions, horizontal, and market extensions.

Starbucks also uses the international strategies of extending into key and emerging developed markets to geographically diversify its products. This strategy has been of significant help as it has made the organization to expand to more than 60 countries.  These strategies have helped Starbucks to derive a substantial competitive advantage over their competitors.

Conclusion

Based on the above analysis, Starbucks has more opportunities for growth and expansion within its external environment as opposed to threats to stay out of business. The company can remain competitive within the market because it takes advantages of the economies of scale and scope and follows a unique business model. Starbucks differentiates itself from other competitors due to the commitment to environmental impact, and its purchasing guidelines. In the company’s international strategy, it needs to transfer its core competencies and capabilities across all its locations to gradually build the profit drivers. Since its biggest growth is in the international segment, the emerging markets of developing countries offer a growing middle-class population hence the need to continually add new stores and attend to more customers. However, it needs to address the bureaucratic tape in these countries to win locally and stay relevant to customers in developing countries.

References

Geereddy, N. (n.d.). Strategic Analysis of Starbucks Corporation. Retrieved from https://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.pdf

Gillespie, A. (2007). PESTEL analysis of the macro-environment. Foundations of Economics, Oxford University Press, USA.

Latif, M., Gulzar, H., Bukhari, S.R. & Sameen, S.N. (2014). Starbucks sustained during economic crisis. International Journal of Accounting and Financial Reporting, 4(1), 307.

Mahobia, H. & Jain, T.K. (2015). Starbucks: Adapting in the Indian Market. Indian Journal of Marketing, 45(8), 37-47.

Noe, R. A., Hollenbeck, J. R., Gerhart, B., & Wright, P. M. (2017). Gaining a competitive advantage. Irwin: McGraw-Hill.

Ouattara, A., Albagli, D., Butz, M. & Kostromichev, M. (2006). Starbucks Brazil. International University in Geneva.

Rothaermel, F. (2017). Starbucks Corporation. McGraw Hill Education. [Case Study]

Shockley-Zalabak, P. S., Morreale, S., & Hackman, M. (2016). Building the high-trust organization: Strategies for supporting five key dimensions of trust (Vol. 7). John Wiley & Sons.

Smithson, N. (2017). Starbucks Coffee PESTEL/PESTLE Analysis & Recommendations. Panmore Insitute. Retrieved from http://panmore.com/starbucks-coffee-pestel-pestle-analysis-recommendations

Starbucks Coffee Company (2015). Company Information – Starbucks Coffee Company.

Starbucks Coffee Company. (2016). Starbucks coffee shops. Retrieved from https://www.starbucks.co.uk/

Yuksel, I. (2012). Developing a multi-criteria decision-making model for PESTEL analysis. International Journal of Business and Management, 7(24), 52.

Appendices

Appendix A

Appendix B

Source: (Geereddy, n.d.)

October 24, 2023
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