Coffee, anyone?

My previous post talks about a company that didn't change with the times. This post, on the other hand, talks of one that did.

Not many companies can boast of having their presence in 62 countries with more than 20,000 stores around the world. From free WiFi to introducing the Italian coffee culture to the rest of the world, since its beginning in 1971, Starbucks has done a lot more rights than wrongs. The rise of Starbucks can be attributed to one man - Howard Schultz, who, ironically, neither started the company nor is an Italian.

 

Starbucks Logo

Starbucks was started by three people from academics - English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker. The store was inspired by Peet's Coffee and Tea, in Berkeley, California. It was not until Howard Schultz joined the company in 1982 that it started to grow at a steady place. His visit to Italy in 1983 convinced him of the potential of a coffeehouse culture in US to the point that he left Starbucks and started his venture, Il Giornale (pronounced ill jor-nahl-ee). This venture faced a lot of criticism. As a case study rightly puts it, "Many who heard Schultz's hour-long presentation saw coffee as a commodity business and thought that Schultz's espresso-bar concept lacked any basis for sustainable competitive advantage (no patent on dark roast, no advantage in purchasing coffee beans, no way to bar the entry of imitative competitors). Some noted that consumption of coffee had been declining since the mid-1960s, others were skeptical that people would pay $1.50 or more for a cup of coffee, and still others were turned off by the company's hard-to-pronounce name." This didn't stop him from pursuing this idea. His espresso-bar would serve beverages made from Starbucks coffee beans. Il Giornale eventually acquired Starbucks in 1987 when the founders of the latter decided to sell it to concentrate on their other interests. Il Giornale was then renamed to Starbucks Corporation, which is the company we see today.

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Events:

So how did Starbucks go from a small store in Seattle, Washington to the largest coffeehouse company in the world? Let's have a look at its timeline (source):

1971 - Starbucks opens its first store in Seattle's Pike Place Market.

The first store

1982 - Howard Schultz joins Starbucks. Starbucks starts providing coffee to restaurants and espresso bars.

1983 - Impressed by coffeehouse culture during his travel to Italy, Schultz sees potential to develop a similar culture in Seattle.

1984 - Coffeehouse in downtown Seattle serves first Starbucks Caffe Latte

1985 - Schultz leaves Starbucks and founds Il Giornale, a company that offers beverages made from Starbucks coffee beans.

1987 - Il Giornale acquires Starbucks (renamed to Starbucks Corp.) Stores open in Chicago and Vancouver.

1988 - Starbucks offers health benefits to full-time and part-time employees.

1991 - Becomes the first privately owned company to offer stock options to part-time employees. Opens first airport store. (Total stores - 116)

1994 - Opens first drive-thru location.

1995 - Introduces Starbucks super premium ice-cream.

1996 - Opens store in Japan (1st store outside North America) and Singapore. (Total stores - 1015)

1997 - Establishes The Starbucks Foundation

1998 - Launches Starbucks.com

1999 - Acquires Hear Music

2003 - Acquires Seattle Coffee Company. (Total stores - 7225)

2006 - Launches industry's first paper beverage cup containing post-consumer recycled fiber. (Total stores - 12440)

2007 - Eliminates all artificial trans-fat and makes 2% milk the new standard.

2008 - Launches My Starbucks Idea, Starbucks' first online community.

2009 - Launches iPhone apps to facilitate mobile payment.

2010 - Offers free unlimited WiFi at its stores.

Free WiFi

2013 - Total stores - 20891

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Analysis:

There are many things that Starbucks did right. Let's look at some of them:

People

1. Employees
Starbucks showed that it cared for its employees time and again. It provided them health benefits. It was the first privately owned company to provide stock options to part-time employees. It also discarded the term employee and replaced it with partner to indicate that the employees had a stake in the company.

2. Customers

Customers' choice

If there are two things that define Starbucks, they would be customer-service and quality of products.

Employees were trained to be knowledgeable about the company's products, communicate the company's passion for coffee, and deliver consistently pleasing customer service. Speedy service was seen as a competitive advantage.

When customers demanded milk without trans-fat in 2007, Schultz had to make a tough decision between the company’s commitment to quality and its goal of pleasing customers. But Starbucks went with the customers' choice of no trans-fat in 2007.

3. Corporate responsibility
The case study also says that Schultz' aspiration was for Starbucks to become the most respected brand name in coffee and for the company to be admired for its corporate responsibility.
The Starbucks Foundation has helped a number of its employees in the developing countries to meet their financial needs.

In 2008, Starbucks started using recycled paper cups to reduce its carbon footprint.

Product

1. Quality
Starbucks avoided franchising to keep the quality of the products under the company's control. To keep the coffee aromas in the stores pure, it banned smoking and discouraged employees from wearing perfumes. Foods were kept covered to minimize the contamination of the coffee smell. All this shows the amount of care Starbucks has taken to keep the quality of its products consistently good.

2. Location

In the initial stages, the company chose its site location based on research data of the demand through mail orders. By 1997, the company had closed just 2 out of 1,500 sites it had opened.

3. Adapting and Innovating

Right from its bold move to bring the Italian coffeehouse culture to US and, later, the rest of the world to its trying out new products such as the Frappuccino and Super Premium ice cream, the company has never shied away from trying out new ideas.

When it comes to technology, Starbucks readily accepted it. It launched its website in 1998, started its first online community in 2008, and launched iPhone apps in 2009. It also offered free WiFi at its stores, which turned out to be a competitive advantage.

However, apart from all the positives listed above, and a controlled scale-up and expansion of its operations across borders, Starbucks has made a few mistakes as well. For example, a study reveals that Starbucks has tried to bring the American coffeehouse culture to Australia, which already has a thriving European cafe culture. It's reception in Australia, therefore, has not been as good as in other places.

Nonetheless, Starbucks is a shining example of how a company can grow from a small corner shop to a multinational powerhouse.

This brings me to the end of this post.

So long,

Ganesh

"Work until your idols become your rivals."

It's a Kodak Moment!

As a profession and a hobby, photography has seen a lot of interest in recent times. I'm sure many of you have used a camera. And I'm sure, if you're old enough, you've heard of a brand called Kodak - the name that every other photographer would utter at the very mention of a film camera.

Kodak logos

Eastman Kodak, or more popularly referred to as Kodak, has seen it all over the years - the consistent growth, the rise, the fall, the bankruptcy, and the recovery. This makes it an excellent candidate for a strategic analysis of its business.

You press the button - we do the rest

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Events:

A look at the timeline reveals most of the factors that led to the rise and fall of this great company:
1880 - Company started by George Eastman

1885 - Kodak introduces the first film role.

The Kodak film

Eastman believes that success comes from user-friendly products - make photography "as convenient as the pencil."

1888 - Kodak camera is marketed with the slogan, “You press the button, we do the rest.” (see picture above)

1890's to 1960's - The company focuses on mass production, extensive advertising, customer focus, and continuous research.
It employs a razor blade strategy - sells cameras for low cost while films drive growth and profits.
Barriers to entry become exceedingly high because of the knowledge that Kodak holds.

1962 - Reaches $1 billion in sales.

1976 - Kodak commands 90% of film sales and 85% of camera sales in the U.S., according to a 2005 case study for Harvard Business School.
Fuji introduces 400-speed color film, which cost 20% less than Kodak's.

1981 - Reaches $10 billion in sales.
Fuji becomes the official sponsor of 1984 Olympics.
Sony launches its first digital camera.

1983 - Kodak CEO Colby Chandler decides to move Kodak from tradition business to digital.

1986 - Kodak introduces the world's first 1.4MP image sensor.

1989 - Focus on image acquisition, storage, software, and printer products.

1991 - Introduces Photo CD (a film substitute, intended to set standards in the digital industry).

Photo CD

1993 - George Fisher, former CEO of Motorola, hired as the CEO (first outsider). 
Fisher believes Kodak's strength lies in imaging - image capture, processing, storage, output, and delivery.

1995 - Introduces DC40, a point and shoot digital camera. Only two other models priced less than $1000 in the market.

1996 - 25 different brands of digital cameras under $1000 in the market.

1997 - Kodak separates business into consumer and commercial segments

1998 - Ventures into Chinese retail film market with a $1.1 billion deal.
Fuji slashes color film prices by as much as 30% in the United States to gain market share.

1999 - Kodak's focus changes from film, paper, and chemicals to image capture, services, and image outputs.

2002 - Kodak ventures into digital processing for photos taken by analog cameras.

2003 - digital cameras remain unprofitable.

2012 - Kodak files for Chapter 11 bankruptcy protection.

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Analysis:

So what made a company that was, at one time, a leader in its industry to file for bankruptcy protection in 2012?
In one word - changing times. The photography and imaging industry moved from traditional film-based to digital. Kodak, however, was not able to transition as quickly as the market did.

1. Industry leaders in film to average competitors in digital:
Kodak was the frontrunner in the film-photography industry having introduced the film cameras itself.
Thus, there was a huge barrier to entry for its competitors as they didn't have the know-how of the production and development. But in the digital age, Kodak had not yet established itself. So its competitors had a lot of scope to enter and capitalize the rising market.

2. Early entry in film to late entry in digital:
Kodak had a lot of time to create, develop, and establish its brand and products in the film era. In the digital age, however, the pace of development was extremely high and the company failed to stay ahead in the race.

3. Focus:
In the traditional business, Kodak had a solid focus. It would sell cameras at a cheap price and drive its growth and profit from film sales. With the advent of the digital age, this focus was lost and replaced by ever-changing business strategies that focused on digital photography at one point and digital imaging at another.

4. Replicating the business model:
Kodak created the concept of film-based photography and being the frontrunner of the industry, its competitors followed suit. In the digital age, Kodak thought that it could do the same (even though it was not the industry leader) and introduced the Photo CD, which would replace the film and would allow Kodak to retain its razor-blade business model.

5. Profitability:
The digital photography industry was not as profitable as the film-based industry was. This caused the company to sell digital cameras at a loss, thereby driving the revenues down and costs up.

6. Price wars:
Fuji slashed the price of its films to gain market share. Kodak's investments at this time were going towards developing digital imaging products, which were not profitable. This meant Kodak would lose out on both fronts - digital and film-based.

The above 6 factors together brought a once shining company to its rather sad fall.
Had Kodak adopted the digital technology as openly and rapidly as its competitors, it would not be out of the race.

Digital photography, then, is a disruptive technology, the success of which depended on the fall of film-based photography. And with disruptive technology, however superior it may be, comes downfalls.

With that, I end this post.

Adios,
Ganesh

"Patience, persistence, and perspiration make an unbeatable combination for success." - Napoleon Hill

Before We Get Started

As I have mentioned in my  previous post, this series of posts is all about business strategy as seen from a third person's perspective.

But before we get started, let us first understand what business strategy means.

Strategy:
Strategy is a plan of action to bring about a desired result.
We frequently encounter this term in such cases as battles, wars, sports, multiplayer video games, and businesses.

Wikipedia defines strategy as a high level plan to achieve one or more goals under conditions of uncertainty. What this essentially means is that, given a limited set of resources and uncertain conditions, to arrive at a predefined goal, we make certain assumptions and make a to-do list that will get us to this goal in the most efficient manner.

Business Strategy:

Deliberately choosing a set of actions to deliver a unique mix of values is called business strategy. In simple words, it is the strategy employed in a business scenario.

Such strategies are focused primarily on one or more of the following:

1. Growth
a. Operations - Expansion / Globalization
The focus here is to increase revenues by either increasing production (quantity and/or variety) or by increasing reception (larger customer base).

b. Finance - Profits
This is achieved by increasing revenues and/or by decreasing costs.

2. Competitive Advantage
a. Quality
Build products that are unique and better (in functionality) than those of the competitors.

b. Service
Many a company has fallen not because it didn't have great products but because it didn't have great services for those products. Better marketing, better customer care, and ease of use go a long way in making a product successful.

Creating sustainable, socially responsible solutions also falls under the ambit of business strategy.

(Source)

Strategy vs Vision:
How is strategy different from vision?
Well, remember the goals that we talked about above? Vision is defining those goals, making them realistic/achievable, yet ambitious.

What's more important - strategy or vision?
While some might argue that vision is more important than strategy, I believe that the two are symbiotic. Knowing where you want to go and knowing how to get there are both equally important.


Levels of Strategy:
While setting up action plans and giving the business a strategic path forward is the task of top executives in the company, it becomes impractical with scale and tasks have to be divided into smaller, manageable parts. This is the case with business strategy too.

Business Strategy can be broadly classified into 3 levels: (Source)

1. Corporate level:
At this level, the company defines the direction it wants to head in. This strategy directly relates to the vision of the company and is usually broad in scope.

2. Business Unit level:
This is where a company creates a roadmap for the business of its product - marketing, revenue generation, cost-cutting, beating the competition, etc. These plans are created keeping in mind the corporate level strategy of the company.

3. Functional level:
Here, a company puts into place operational methods that execute the business unit level strategies. For example, cost-cutting may be assigned to the development and operations teams of a product whereas gaining market share may be assigned to the marketing team of the product. It has been noted that strategies at this level are often interdependent.

Looking at the three levels above, it's clear that, as we move down the line, the strategies become less vision-oriented and more action-oriented. This is precisely why most companies have a pyramidal structure of hierarchy - actions require more man power than vision. While this pyramidal structure forms natural hierarchies in an organization, it is imperative that every employee of that organization be aware of the strategies in place from top to bottom. This helps the employee relate his work to the bigger picture and become an integral part of the organization.

Now that we know what business strategy means, we will move to real examples of businesses and strategies employed by them in the subsequent posts.

'til next time,
Ganesh

"It's the possibility of having a dream come true that makes life interesting."