Starbucks Cuts Prices on Bags of Coffee

As we discussed in Chapter 2, cost leadership is one of the keys to achieving a competitive advantage over the opposition.  Having the lowest cost, as perceived by the customer, without sacrificing quality, is the key to beating the competition.  Starbucks is attempting to do just that by cutting the price of its bags of coffee by $1 per bag this year.  This reduction in price would make the cost of their bags of coffee comparable to those sold by Folgers, Maxwell House, and Dunkin’ Donuts, all of whom cut their prices this year as well.  Ultimately, Starbucks’ goal is to draw sales away from their competitors, even if they aren’t making as much money per bag of coffee.

The rationale behind the cut in price is to attract a new demographic to purchase their product.  Currently Starbucks’ in-house coffees are among the most expensive, yet they continue to outsell the competition.  By selling their bags of coffee for about the same price as their competitors, they are able to attract the lower end of the socioeconomic ladder, as opposed to just the upper end.  Assuming they aren’t sacrificing quality, the Starbucks brand bags of coffee would be the best available option to these consumers.  Overall, they would be reaching a much wider market then their competitors.

In order to earn as much revenue on bags of coffee as they did last year, Starbucks would have to sell 65% more bags at the new price.  Starbucks knows they probably won’t achieve those numbers, but if they continue to steal customers from their competitors, they will eventually reach that number and eventually sell even more.

The move also forces Starbucks’ competitors to make a tough decision.  Either they can keep prices where they are at, or they can continue to cut their prices and trim profits.  Another possibility is that they can cut volume.  Either way, Starbucks walks away a clear winner.  At the rate they are going, Starbucks is slated to run its competitors out of business.

I think this is a great move by Starbucks.  It’s no mystery that a majority of Americans prefer Starbucks coffee to other brands, and by making it more widely available, they can increase their sales exponentially.  Sales won’t increase immediately, but in the long run they most likely will.  Once consumers realize they can get their favorite, high-quality coffee for the same price as lower-quality brands, odds are they’ll opt for the higher quality product.  And even though the profit margins won’t be as high for the bags of coffee, they will still be huge on the in-house brews.  In the end, Starbucks has the highest quality coffee on the market as chosen by consumers, and at its new low price, Starbucks will have the competitive advantage as well.


Helping yourself to the top spot by helping others

We have learned a lot of different strategies that firms can use in order to be competitive in the marketplace. They varied from having a quick response to offering the cheapest product. However, companies these days are trying to do everything in their power to stay competitive. There is no reason that they shouldn’t do anything in their power to be known as a great company and thus get better sales. A big new aspect for businesses is volunteering.

IBM is one of the biggest companies that has been volunteering and helping out communities since its inception five years ago. Just last year, IBM’s 430,000 employees spent 3.2 million hours volunteering. In her article Volunteerism as a Core Competency, Diana Brady said, “The company (IBM) makes sure its philanthropic efforts align with its business objectives”. They are incorporating their employees into helping out the community and those that are less fortunate. This is fantastic for a number of reasons. For starters, people who need help get reached out to and their lives are improved. There are also reasons that benefit the company. By working on these small projects together, the employees are building relationships with one another. A task force that knows each other and cares about each other can work as a well oiled machine and get things done faster than just a bunch of employees who barely know each others names. Lastly, there is also the benefit of goodwill. Goodwill is when a company is in the positive eye of the public because of the actions that it has taken. Customers want to purchase from companies that are helping the environment and the communities in which they are located. Purchasing from those companies makes the customer feel like part of their money is going into these causes that the company is helping.

As the article states, a lot of Wall Street firms need to rebuild their credibility in the wake of the financial crisis. Volunteering and getting involved is a perfect way of getting that done. But what kind of projects should they start? Regarding what to do, Diana Brady said, “Projects have more impact when they draw on a company’s strength”. That means that companies should try to get involved in a way that is similar to their business objectives just like IBM. An example is FedEx delivering emergency medicine to disaster areas. In that example, FedEx is able to help out using delivery which is something that they excel at. They get to show off their strengths to the public and possibly attract a lot of new business for themselves.

One aspect of this is that people would believe that a company is truly good and has good morals. With all the recent popularity of volunteering, more and more companies are doing what they can to help out. This is fantastic. However, are these companies helping out solely based on trying to get more sales? Either way people are receiving aid but should companies only volunteer in order to stay competitive?