Journal Archive

Digital Transformation (DT) is the use of digital technology to improve business processes or to enhance customer service. It is about replacing manual process with digital technology and digital processes. By making good use of digital technology, a company could succeed in disrupting the market. Those who fail to capitalize on the opportunity could end up being left behind by rapid technological change. Disruptive technologies have a great influence on the rise and fall of companies. Innovation provides the opportunity for companies to become the new market leaders. In this paper, I will discuss the digital transformation of Starbucks, a market leader in the coffee industry. In 2008, Starbucks was hit badly by the global financial crisis and shrinking sales due to excessive store expansion and competition from “Dunkin Donuts” and “McDonalds,” which had introduced cheap coffee. Faced with such a crisis, Howard Schultz returned to the position of CEO in 2008, with a strategy to refocus on the core values of Starbucks, ie. the essence of coffee, building of emotional bonds with customers and enhancing customer experience. Digital transformation strategies such as, digital flywheel, 'Reward', 'Personalization', 'Payment', and 'Ordering' were developed to enhance customer experience, convenience and sales growth as well. By successfully implementing digital transformation, it has reshaped the market. Consequently, the number of Starbucks stores worldwide in 2019 nearly doubled the 16,680 that were operating in 2008. (see Figure 1) and net profits generated worldwide also increased from US$10.4 billion in 2008 to US$26.5 billion in 2019 (Figure 2)

Fig. 1. 
The Number of Starbucks Locations Worldwide 2003-2019 [1]

Fig. 2. 
Net Revenue of Statbucks Locations Worldwide 2003-2019 [1]

In this paper, I examine the digital transformation process implemented by Starbucks; a brand that is encountered every day. I will discuss their strategies while comparing it with general digital processes and the value that has been created. It is important to investigate the impact of digital transformation on customers, business management and on value creation. Starbucks' unique DT flow chart was derived through the use of big data, personalized service, omni-channel marketing, and commercialization of mobile pay etc based on a compilation of Vial's building blocks. This paper presents concrete examples of digital technology, IT business and management strategies, and value creation that comprise elements of the DT process implemented by Starbucks.

This paper analyzes the unique characteristics of Sturbucks' DT process and compare it to the DT process that has been carried out in general companies or industries.

Digital Transformation is the implementation of digital solutions or new technology in a business with the aim of improving operational processes and enhanced productivity within a business. Digital transformation is a business strategy that fundamentally changes a company's strategy, organization, process, business model, culture, communication, and system.

IDC[2] defined it as a continuous process that adapts to or promotes disruptive changes in customers and markets (external ecosystem) by utilizing digital capabilities to create new business models, products and services. A.T. Kearney[3] defined as a corporate activity that significantly increases the competitiveness of the current business or pursuing new growth opportunities by proactively responding to changes in the business environment that is triggered by new digital technologies such as big data, AI, and IoT. [4 ]

Vial [4] reviewed the latest research on digital transformation and identified the interactions of eight building blocks.

Figure 3 is a compilation of Vial's building blocks that are related to this paper. Here, digital technologies represented by Social, Mobile, Analytic, Internet of Things, Platforms & ecosystem changed consumers' consumption behavior and expectations, influenced the competitive structure within an industry, and created Big Data.

Fig. 3. 
Building Block of Digital Transformation Process from Vial [4].

To respond to these “disruptive” structural changes and survive in the new environment (Karami and Walter )[5], companies need to adopt a digital IT business strategy and a digital transformation strategy. Embracing, digital transformation provides companies with opportunities to create new value.

In Figure 3, the white arrow represents the global trend (industrial or social), and the black arrow represents the digital transformation process of individual companies. The arrows do not represent statistical causal causality, but rather the relationships between individual building blocks described in the digital transformation literature.

In this paper, through the case of Starbucks' digital transformation, I would like to examine how the building blocks of Starbucks' digital transformation process show interrelationships with previous studies.

Starbucks, which started out as a small café in Seattle, USA, is now a ‘global brand'. It operates over 29,000 stores in 78 markets around the world, has 200,000 employees, and more than 60 million customers visit the store every week. Global sales in 2018 amounted to 27 trillion won. However, from 2007 to 2008, Starbucks faced its worst crisis. The big problem was that they had lost their competitive edge. The company added stores too aggressively without much thought towards profitability. In the centre of New York it opened one store every 100m. Owing to this, overall global sales increased, but sales per store increased by only 5%, and consumers per store increased by only 1%. In the meantime, the US subprime mortgage crisis hit the world economy. Consumption stagnated amid economic hardships, and Starbucks shares plunged 42% that year. In January 2008, Howard Schultz, chairman of the board, returned as CEO.

For this exploratory case study, I modified Vial's DT flow chart to describe the elements of Starbucks’s DT process. Information about Starbucks’s DT were gathered from press interviews, company presentations and press articles. Then, I compare Starbucks’s DT with Vial’s DT flow chart for general companies and industries.

So, how did Starbucks turnaround its business?

Let me review the digital transformation strategies that Starbuck's implemented after the 2008 crisis as outline in various media interview with its chief executive Howard Schultz and their chief digital officer. In a digital transformation survey conducted with 1559 senior executives ([6]) by MIT School Management Review and Capgemini Consulting in 2013, 78% of respondents believe that digital transformation will be a decisive factor for their organization in the next two years, 63% of respondents say that the development and application of technology in their organization is too slow.

The main reason was “lack of urgency.” Only 38% of respondents said that digital transformation is perceived as a clear goal by the CEOs of their organizations.

However, Starbucks' chief executive officer Howard Schultz view of digital transformation was different from most senior executives who took part in the survey. McKinsey Quarterly [7] in 2011 published an interview with Schultz [8] in which he descrbed the stagnating growth he experienced in 2008 as "Carcenogen", Schultz presented seven transformation agendas. The company closed more than 600 stores in the U.S., which were not competitive, simplified the complex logistics system, started global expansion, initiated a reward card program for customers, and started Starbucks Shared Planet (Starbucks Shared) for social contribution. “Our plan is to create a distribution channel roll that can be viewed anywhere at Starbucks stores and link it with our current digital media and mobile programs,” said Howard Schulz. It was “to create an innovative growth platform tailored to our coffee brand”.However, Starbucks' chief executive Howard Schultz view of digital transformation was different from most senior executives who took part in the survey. In an interview with Schultz Schultz[8] published in McKinsey Quarterly[7] in 2011, he described the stagnating growth he experienced in 2008 as "Carcenogen". Schultz then presented seven transformation agendas. The company closed more than 600 stores in the U.S., which were not competitive, simplified the complex logistics system, started global expansion, initiated a reward card program for customers, and started Starbucks Shared Planet (Starbucks Shared) for social contribution. “Our plan is to create a distribution channel roll that can be viewed anywhere at Starbucks stores and link it with our current digital media and mobile programs,” said Howard Schulz. It was “to create an innovative growth platform tailored to our coffee brand”.

In 2008, Starbucks devised seven overarching Big Moves to transform the company into one solid footing. Seven goals were as follows: 1. To be the leading authority on coffee 2.Engross and invigorate our partners 3.To engage with our customers emotionally 4. Expand our presence globally but with the goal of making each store the hub of the community 5. Maintain highest standards in ethical sourcing and impact on environment 6. Develop innovative platforms that will drive growth 7. Produce a sustainable business model [9].

In an interview with MIT Sloan Management Review [10] in 2013, Adam Brotman, then Chief Digital Officer (CDO), and Kurt Gamer, Chief Information Officer (CIO) described how open-minded Starbucks CEO Howard Schultz was about the so-called ‘digital Starbucks'. For Starbucks, being digital is not just about having a website or a point-of-sale system; it is about the ability to connect with customers and changing and enchancing the customer's experience. Adam Brotman then went on to describe the digital projects that were in progress in 2012, “We are already working on improving payment-related matters such as mobile payment for customer satisfaction. In addition, we have improved our Loyalty system and Loyalty programs and developed related technologies. In this regard, Kurd Gamer said, “Currently, we are working on over 100 IT-related projects, of which 35 are related to customers or Starbucks partners. As a fast-growing company, through this digital transformation, we are increasing the efficiency and productivity of our work and reducing costs across the organization.”

They also said, “Sometimes the good ideas we have come from outside the digital organization. For example, in meetings with many store managers, from the experiences they have had while communicating with customers, they get an idea of how digital technology can reduce direct conflicts with customers. We also get ideas from the company's CEO Howard Schultz and the company's senior leadership team.”

According to the US digital market research agency “E-Marketer,” the most common mobile payment application in the US was Starbucks. The following are specific examples of digital transformation developed by Starbucks and applied to real business.

Starbucks application of digital transformation processes and technologies can be largely divided into strategies for customers and strategies for business management. By expanding the personalized service, targeted marketing was developed, and the same personalized service was provided on various electronic devices. In order to strengthen the Flywheel mobile platform, data such as product, price, inventory, location, time, sales volume, and unit of sale are stored on the cloud, integrated and analyzed with artificial intelligence to provide a more personalized responsive customer experience. Starbuck’s success in increasing sales via mobile apps, is making more efforts to expand contact points with customers through the introduction of new technologies such as artificial intelligent chat bots.

As the conclusion of this paper, Figure 4 summarizes the Starbucks digital transformation process. Leading digital companies are pursuing digital transformation by considering the competitive environment of industries and markets according to supply and demand and devising strategies according to the context of the company[14]. In other words, based on the understanding and analysis of the company's unique processes, they can optimize and reconstruct (rebuild) the business (operation) model by using the latest digital technology.

Fig. 4. 
Starbucks Digital Transformation Process.

Starbucks confirms the usefulness of a digital transformation strategy with a two-track method that simultaneously considers business development and operational efficiency and executes on those strategies with mobile apps such as siren order, flywheel, MOST and digital platforms.

MOST and digital platforms.

The Starbucks case also confirms the digital transformation strategy that "the vision and target of digital transformation must be clearly set and executed according to the clear vision of the CEO." The core focus of digital transformation methodologies offered by various consulting companies is learning and analysing various channels, decision making, direction establishment, and expansion. Starbucks has online channels, offline channels, and drive-through channels to increase communication channel contact points with customers and improve consumer experience. For example, Starbucks combined license plate recognition and automatic payment system for its drive-through service. Deploying ICT for business model reorganization and ecosystem transformation is essential for digital transformation.

Starbucks also confirms the usefulness of digital transformation, "We always operate a strategic organization dedicated to planning and implementing digital transformation." Schulz formed Starbucks Digital Ventures (SDV) in 2008. SDV consists of an organization directly under the CEO. It was charged with communicating with customers, in-house engineers, marketers, designers, and other members to quickly implement the service. When comparing the agenda of the existing research discussed in the theoretical background, the most striking difference is that the digital-related strategy setting of a company is not a passive reaction to disruptive changes in the business management environment. Conversely the goal is to implement active strategies that can create a new business environment for new growth. These active digital strategies have led to the development of new digital technologies tailored for companies, and these technologies have changed consumer behavior and expectations.

Starbucks used big data gathered from new digital technologies to provide personalized service and marketing through omni-channels. In addition, Starbucks card cash deposits were used to create financial business opportunities. Starbucks is a leader in incorporating core values, digital technologies, and sustainability into its business strategy. The core focus of Starbucks’s business strategy is always about enhancing customer experience.

Now, no company can ignore digital transformation. Starbucks' digital transformation justifies the case that manufacturing, and consumer goods companies need to adopt ICT for digital transformation. Digital transformation is not only about adapting to change, it is a strategic inflection point in the trend towards the fourth industrial revolution. Depending on whether the strategies are well executed or not, It can elevate a company to be a market leader or it may perish. Starbucks DT mobile payment initiative is a key difference between general DT seen in other companies. The mobile App initiative has created significant value of the company generating up to 25% of all sales in the US ($1.30 billion). The company’s mobile payment service has accumulated $1 billion in customer deposits and enable Starbucks to become a financial services company such as deposit taking and making simple payments. Going forward, Starbucks plans to offer Bakkt Cash, a crypto currency, for its mobile payment customers, Bakkt Cash is being developed by Bakkt, a leading crypto futures exchange.

Companies must develop a digital mindset and learn how to align digital technologies with their core values to achieve sustainable business goals.

These initiatives were driven by management leadership rather than a response to the external environment.

I found that the aspect of digital transformation for customers and business management and value creation. Starbucks' unique DT flow chart was derived through the use of big data, personalized service, omni-channel marketing, and commercialization of mobile pay etc. These initiatives were driven by management leadership rather than a response to the external environment. Starbucks introduced digital transformation for business management and customized services by analysing big data on individual location and tastes and from their omni channel interactions.

Starbucks develops and provides digital platforms based on digital transformation and digital acceleration technologies and consequently, strengthened its capabilities to build and expand ecosystems to establish a leading position. It is an excellent example of a successful digital transformation that continues to grow.