The Time article I referred to in my previous post points to Starbucks’ growth challenges: it is now poised to grow profitably from 12,440 locations worldwide to 40,000. The article is unusually clear and sharp in its analysis and one cannot help but speculate what Starbucks will be like in a year or two. As I see it, the article points to complexity as the main challenge to growth but it falls into the fallacy of implying that increasing complexity adds to operational risk (i.e. that the more complex a company gets, the more it is likely to go awry and start failing).
As I pointed out in a previous post about the 36% rule, Dr. Rodrigues found that complexity per se is not good nor bad, its consequences are positive or negative depending on how it is managed; that is, systems fall apart when they dedicate more than 36% of available resources to managing complexity. Companies that are able to manage increasing complexity without significant commitment of resources may take a hit in their profits but are quite unlikely to go bust. This is a case in which what is important is the “how” rather than the “what”: it’s about how complexity is managed not about how much more complex the company has become.
All in all, it seems like Starbucks is on the right track in managing its added complexity, it may have its hiccups but if it carries on with its current path it may well achieve its growth targets.
Let’s take a quick look at some complexity challenges discussed in the article:
- Geographic expansion – ok, this certainly adds to fixed costs and carries an immense investment burden up-front but a well executed geo expansion plan for a company that has Starbucks’ footprint does not necessarily add to complexity. The resources necessary to run a store map out to those necessary to run a new store, it’s not like new stores require the acquisition of new skill sets or the creation of new processes or products. Moreover, with its current supply chain, newer stores should be open at lower costs than older ones: the distribution system is in place, all logistics are in place and its only a matter of adding another node – no small matter but not a daunting task either. In fact adding new stores will further amortize the cost of setting up and expanding the supply network.
- Maximize square footage profitability – so Starbucks stores now sell all sorts of coffee related, items, coffee, beverages, food, CDs, Scrabble sets and what not, adding new items does not add linearly to complexity: for example, adding a line of CDs to the product line-up requires some procurement and supply chain work, there will be extra carrying inventory to worry about but that is not that different from adding a new line of coffee and it’s not like some new and complicated process has to be designed and new resources acquired to manage the sale of CDs. Adding products that do not require a store value add (i.e. that do not require someone to prepare or configure them at the store) is not a significant burden on process complexity
- Dayparts expansion – given that 60% of sales take place before 10:00am, Starbucks has plenty of room to expand to new dayparts, this will require the introduction of new products and processes and this the only aspect of growth that, I fear, may have a negative impact on the management of complexity. The authors mention the impact that adding ovens and introducing semi-automated beverage machinery had on store operations, but I think that if Starbucks can tackle these added complexities without losing sight of its focus on brand value and customer experience, it will grow quite profitably. Also, although these added complexities build increase cost, they are investments bound to increase sales and profitability.
From what I gather Starbucks is quite likely to attain its growth targets and is still very far from the 36% mark.
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