Starbucks Failure In Israel_avner Barnea

Analysis of a Failed Venture: Starbucks in Israel

Avner Barnea –Competitive Intelligence Strategic Consultant, Israel 1

Starbucks in Israel – basic facts Date of opening the first shop- May 2001 z Number of shops- 6 z Date of closing the operation in IsraelApr 2003 Apr. z Info. about Starbucks (2001) z

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Process Sources: • Public information. • Interviews. Interviews Analysis: Day, G. Schoemaker, P., (2006), Peripheral Vision. HBSP z “Peripheral vision”. Watkins M Watkins, M. and Bazerman M. M (2003). (2003) "Predictable Predictable Surprises. Harvard Business Review z “Predictable surprise”. z “Customer Value Analysis”. 3

Coffee Shop p Markets in Israel Prior to Starbucks Entry y •

1930s: Established coffee culture. Mid-’90s: Arrival of international coffee

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2001:

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2006:

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brands. 750 local coffee shops  50% in ~50% i Tel T l Aviv; A i 3% chains. h i 38% visit at least once a week. 55% appreciate quality coffee coffee. 60% are aware of Starbucks brand. 1050 local coffee shops shops. 23% in Tel Aviv; 23% chains. 4

Coffee Shops p Markets in Israel Prior to Starbucks Entry o o o o o

Significant market growth, Mid ‘90s-2001. Customers visit more frequently, stay longer (to socialize). Customers demand/get new coffee types, tastes, quality light food. food Customers already familiar with quality coffee, mainlyy through g imported p brands. Coffee shops actively attract customers, strengthen loyalty through improved service, product diversity, comfortable f t bl furniture, f it special i l marketing k ti activities. ti iti

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Starbucks Strategy in Israel Resources Tangible

Excellent locations Strong Financial support Quality products High quality service

Intangible High brand reputation Exceeded customer expectations

Capabilities Superior technology Designed comfortable shops High-end management Fast expansion of shops

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Israeli Customer Characteristics o o o o

Early adoptors, very demanding and service oriented oriented. Leaders in adoption of fashion trends. Highly exposed to the outside world. Tend to share their experiences. experiences The launch of Starbucks in Israel was a remarkable success in its early stage 7

Competitors were worried, actively scanning… o

Worried and actively scanning

Primary findings: o Many Starbucks Starbucks' customers were dissatisfied with quality of coffee and service. o Coffee was perceived as inferior to brands already in the market. o Starbucks was unaware of local customer sentiment. 8

Customer Value Analysis y Prices too high for given products and service quality

Competition Customer Value

Starbucks Israel did not deliver good customer value

Price

Product quality

Service Quality 9

Customer Value Map p competitors above the line and the left- in a sharelosing position Relative Price

Fair i value l Line

Starbucks Is ael Israel Local Coffee Chains

Independent C ff shops Coffee h

competitors below the line and rightin a strong sharegaining g gp position

Performance- Service, Quality, Diversity

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Why Starbucks Failed in Israel? Resources Tangible

Planning: Excellent locations Execution: Selection of locations was wrong, especially to

concentrate in Tel Aviv

Planning: Strong Financial support Execution: Investors did not back as expected Planning: Quality products Execution: The products were not perceived as higher quality Planning: High quality service Execution: Relatively not good enough service

Intangible Planning: Leverage of high brand reputation Execution: A gap between the brand reputation and the

performance as perceived in the local market

Planning: g Exceeded customer expectations p Execution: Did not adjust to the local requirements and tastes 11

Why y Starbucks failed in Israel? Cont. Capabilities

Resources Planning: Superior technology Execution: Local coffee technology was not inferior Planning: Designed comfortable shops Execution: Local coffee shops were often more impressive and comfortable

Planning: l i High-end i h d management Execution: Inexperienced senior management and many managerial changes in a short time

Planning: l i Fast expansion i off shops h Execution: Only 6 shops in 2 years

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Peripheral Vision Peripheral Vision: “A portfolio of scanning methods to capture and amplify the weak signals within targeted zones of the periphery: inside the firm, customers and channels; the competitive space; technologies, technologies political, political social and economic forces; and influencers and shapers“…. Active, open-ended scans are particularly important in turbulent environments or new areas of activity where unexpected, outlying data might become more important. Day, G. and Schoemaker, P. [2006], Peripheral Vision- Detecting the Weak Signals that Make or Break your Company. Harvard Business School Press.

These are also many of the characteristics of implementing a quality Competitive Intelligence discipline.

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Peripheral Vision and Starbucks in Israel… Senior management: o The business plan did not fit the needs of the market. o Were not scanning systematically the external environment. o Were passive and reacted in delay. o Were not ready to read the bad news. o Remained optimistic despite clear signals of failure. 14

Predictable Surprises Arise from failures of: •

R Recognition: i i E Executives i are unaware off emerging problems.

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P i iti ti Prioritization: P t ti l th Potential threatt iis recognized i d but b t not acted upon immediately.

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M bili ti Mobilization: Th t iis recognized Threat i d and d responded to immediately but response is ineffective. Watkins, M. and Bazerman M. (2003). "Predictable Surprises: The Disasters You Should Have Seen Coming", Harvard Business Review

OnPoint collection.

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Failures of Predictable Surprises 1

The problem: Customers are not satisfied

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Identified as a surprise too late and only in retrospect

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Recognized R i d but b t failed to prioritize and mobilize

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Identified Id ifi d as a surprise too late and only in retrospect – the business closed

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Predictable Surprises and Starbucks in Israel… •

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Psychological: CI was unknown to many executives. Also suffered from Bounded Awareness that prevents from seeing seeing, seeking using and sharing information during decisionmaking process. Organizational: CI support was not an integral component of the organizational structure. Political: Internal objection to CI participation in routine business activities.

In the absence of recognition, there was no prioritization and no mobilization that could save the Starbucks operation in Israel.

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Conclusions o o o o o o

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The business plan did not fit the needs of the customers, the marketplace and lack awareness of the competitive space. The poor results were mainly a result of lack of peripheral scanning and incorrect reading of the market signals signals. Starbucks Israel did not believe it was critical to listen to the local customers. They proceeded with the same strategy expecting that the awaited change will come soon as a result of strengthening the marketing campaign campaign. The minor changes that management tried to present towards the end, were too late and too small. GloCalization of a product is more likely to succeed when the product or service is adapted specifically to each locality or culture it is marketed in in. Lack of commitment by the management to its strategic intent led to the absence of sense of challenge that withheld entry to a crisis mode that was needed.. They ey failed a ed to build bu d a comprehensive co p e e s e strategic st ateg c response, espo se, instead stead reacted eacted tactically and partially too late and without a strategic focus.

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And a Final Word… Word Since its failure in 2003, Starbucks did not try to make another attempt in Israel…. And… what is the name of the only countryy where Starbucks raised a white flag???

Thank you

Avner Barnea [email protected] @ t i i t il 19