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Tutorial 4 – Starbucks case – strategyQuestions:
a. Which business did Starbucks expand to? Which business did it exit from? Which kind
of CLS (individual moves) did these expansions and exists represent?
Starbucks expended into the coffee bean purchasing and roasting (which can be labeled as
vertically integrating backward). Next to this, the company horizontally expanded through
growing its retail stores, selling its product in grocery stores and opening company-owned
licensed stores. Moreover, Starbucks indicated in their blueprint for profitable growth that
they intended to introduce new products and brands in its Starbucks retail stores, and later
on expand distribution to mass-market channels like grocery stores. To do this, Starbucks
need to acquire some major distribution companies and thus vertically integrate. A. new
business that Starbucks entered in the late 2011 was the one of the fresh juices, which
requires a product diversification strategy. The same accounts for the takeover of La
Boulange (2012) and Teavana (2013). The main exit of the company in 2007 pressed
Starbucks to close down a big part of their stores, and focus again on the customer
experience, by cutting out breakfast items and only focus on coffee.
Mergers and acquisitions is more of a business-level strategy, a way to implement one of the
three (product diversification, horizontal integration, vertical integration).
Three implementations:
- Autonomic growth
- Acquisition
- Alliances
Horizontal expansion: you either come with a product variation in the same industry, f.e. ice
coffee. OR selling to a different market. (your customers change). So, you can say that they
expand with horizontal integration. Nevertheless, you can also say that Starbucks acts as a
wholesaler now, offering the product to end consumers, so then it is product diversification.
If a company exits a certain strategy, it can also be anti-product diversification, or f.e. if they
exit the breakfast, they might pursue a horizontal expansion strategy as they are focusing on
one industry.
Difference product diversification and vertical integration: vertical integration stays within
the boundary of the value chain and product diversification means going without your own
value chain. Sometimes there is an overlap, if you do an acquisition you serve multiple
corporate level strategies. If you buy a supplier, and they also generates outside sales as a
wholesaler, which can be seen as product diversification.
b. Assess the advantages and disadvantages of three of these expansions and exits for
Starbucks in particular.
Vertical integration backward into the supply chain:
- Advantage: Reduction of production costs and more bargaining power as you are not
dependent on the suppliers of coffee beans.
- Disadvantage: increased volatility. As you as a company own the distribution and
supply of your products, the pressure of handling them efficient and correctly
increases.
Horizontal expansion:
- Advantage: economies of scale. The per-units costs decrease as the production costs
can be divided over more units. An even more important advantage is the reduction
of competitors. By taking over different brands and opening licensed stores, you
reduce the chances of competitors taking this spot in the market.
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