Analysis of a Failed

Venture: Starbucks in
Israel

Avner Barnea –Competitive Intelligence Strategic Consultant, Israel

1
 Starbucks in Israel – basic
facts
z Date of opening the first shop- May
2001
z Number of shops- 6
z Date of closing the operation in Israel-
Apr 2003
Apr.
z Info. about Starbucks (2001)

2
 Process

Sources:
• Public information.
• Interviews.
Interviews

Analysis: Day, G. Schoemaker, P., (2006), Peripheral Vision.

z “Peripheral vision”.
HBSP

z “Predictable surprise”.
Watkins M
Watkins, M. and Bazerman M.
M (2003).
(2003) "Predictable
Predictable
Surprises. Harvard Business Review

z “Customer Value Analysis”.

3
 Coffee Shopp Markets in Israel
Prior to Starbucks Entryy
• 1930s: Established coffee culture.
• Mid-’90s: Arrival of international coffee
brands.
• 2001: 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.
• 2006: 1050 local coffee shops
shops.
23% in Tel Aviv; 23% chains.

4
Coffee Shops
p Markets in Israel Prior
to Starbucks Entry

o Significant market growth, Mid ‘90s-2001.

o Customers visit more frequently, stay longer (to
socialize).
o Customers demand/get new coffee types, tastes,
quality light food.
food
o Customers already familiar with quality coffee,
mainlyy through
g imported
p brands.
o 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

5
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 6

Israeli Customer Characteristics

o Early adoptors, very demanding and

service oriented
oriented.
o Leaders in adoption of fashion trends.
o Highly exposed to the outside world.
o Tend to share their experiences.
experiences

The launch of Starbucks in Israel was a

remarkable success in its early stage
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 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.

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 Customer Value Analysis
y

Prices too high Competition

for given Starbucks Israel
products and did not deliver good
Customer
customer value
service quality Value

Price

Product Service
quality Quality

9
 Customer Value Map
p
competitors above
the line and the
left- in a share- Fair
i value
l
losing position Line

Relative
Price Starbucks
Is ael
Israel

Local
Coffee
Chains

Independent
C ff shops
Coffee h competitors below
the line and right-
in a strong share-
gaining
g gpposition

Performance- Service, Quality, Diversity

10
 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. 13
 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.

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 Predictable Surprises

Arise from failures of:

• R
Recognition:
i i E
Executives
i are unaware off
emerging problems.
• P i iti ti
Prioritization: P t ti l th
Potential threatt iis recognized
i d but
b t
not acted upon immediately.
• 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.
15
 Failures of Predictable
Surprises
1 The problem:
Customers are not 2 Identified as a
satisfied surprise too late and
only in retrospect

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

4 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…
• Psychological: CI was unknown to many
executives. Also suffered from Bounded
Awareness that prevents from seeing
seeing, seeking
using and sharing information during decision-
making 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. 17
 Conclusions
o The business plan did not fit the needs of the customers, the marketplace and
lack awareness of the competitive space.
o The poor results were mainly a result of lack of peripheral scanning and
incorrect reading of the market signals
signals.
o Starbucks Israel did not believe it was critical to listen to the local
customers.
o They proceeded with the same strategy expecting that the awaited change
will come soon as a result of strengthening the marketing campaigncampaign.
o The minor changes that management tried to present towards the end,
were too late and too small.
o 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.
o 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..
o 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
avnerpro@netvision.net.il
@ t i i t il
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