HOW STARBUCKS EXPLOITS SOCIAL MEDIA TO ENHANCE CUSTOMER

DRIVEN INNOVATION

Student number: 1504063

Programme: Business Intelligence and Social Media

Module code: MG5594

Module title: Knowledge Management

Date of submission: 18 March 2015

1. Introduction

The external environment for many organisations now days is characterised by turbulence

associated with globalization, deregulation of markets, changing customer and investor

demands and increasing product-market competition (Jashapara, 2011). There is a growing

need in organisations to move beyond solving existing problems to improving continuously in

the face of changing conditions (Hamel and Prahalad, 1994). Knowledge has emerged as the

most strategically significant resource of the firm (Grant, 1996) and the ability of a firm to

learn faster than its competitors as the only sustainable form of competitive advantage (De

Geus, 1988). In accordance with the view of knowledge as a capability Newell et al. (2009)

define knowledge management as processes aimed at improving the ways in which firms

facing highly turbulent environments can leverage their knowledge assets in order to ensure

continuous innovation. Innovations rely heavily on social interactions between different

interests (Jashapara, 2011). Hence Jashapara (2011) concludes that social networks are

essential for the success of innovations.

Starbucks is an international coffee house chain, which consistently attracted around 60

million weekly visitors across the globe (Michelli, 2007), before it saw its earnings drop

drastically in 2008 (York, 2010). To re-boost its decreasing sales Starbucks started

experimenting with social media services (Schultz and Gordon, 2011). In 2010 the coffee

chain began to see sales lifts following its social media endeavours (York, 2010).

The following formal report will: first, critically discuss the nature and process of knowledge

creation and transfer within organisations; second, critically evaluate how organisational and

social dynamics combine to engender innovation; third, analyse how Starbucks applied the

discussed concepts and theories to its customer-centric knowledge management strategy;

fourth, provide recommendations for Starbucks how to even increase its innovation capacity

with further exploitation of social media.

2. Organisational learning

The learning theory in much of the literature on organisational learning stems from either

behaviourist or cognitive individual-orientated psychological perspectives. These perspectives

see decision making in organisations as done by individuals, and as a process that can be

enhanced by individuals’ learning. By way of individuals’ acting on behalf of organisation

individuals’ learning outcome can be crystallized in organisational routines and values and

become organisational learning (Brandi and Elkjaer, 2011). According to Argyris and Schön

(1996) the individual-organisational split-up remains one of the major problems in the

organisational learning literature based upon individual learning theory.

Social learning theory has grown out of criticism of individual learning theory. Father of

social learning theory Bandura (1977) explains human behaviour as continuous interaction

between cognitive, behavioural and environmental factors. Similarly, Lave and Wenger

(1990) argue that all learning is situated in activity, context and culture. Learners engage in a

community of practice, an informal network of learners, and the social interaction embodies

the beliefs and behaviours to be acquired. In social learning theory it is not just the individuals

who solely retain knowledge; rather knowledge is distributed within and among artefacts and

organisational members (Richter, 1998). Brandi and Elkjaer (2011) urge that social learning

theory might be problematic due to its strong focus on the organisational context, thus failing

to encompass the mobile, knowledgeable, and potentially influential individuals.

Crossan, Lane and White (1999) tried to overcome critiques of individual and social learning

theory by formulating an integrated 4I model of organisational learning. The 4I model

considers organisational learning at individual, group and organisational level. The 4I

framework builds on the tension between exploration and exploitation in organisation and

places these notions at the heart of strategic renewal. Strategic renewal stems from

organisations exploring and learning new ways while at the same time exploiting what they

have already learnt. Four learning processes flow from one another without any distinction

where they begin or end: intuiting as largely subconscious process that requires pattern

recognition, which may lead to exploitation, however, it also generates new insights;

interpreting as process of explaining through words and/or actions an insight to one’s self or

another person; integrating as learning process aimed at developing shared understanding and

taking coordinated action; institutionalizing as learning process to ensure that routinized

actions occur. Jashapara (2011) criticises 4I model because most of innovation rests on

intuiting in the first individual phase. Without the necessary feedback loops it is unlikely that

the institutionalised organisational routines would be challenged, with a consequence of

exploitation behaviours predominating within any organisation (Jashapara, 2011).

3. Knowledge management

To be able to comprehend knowledge management (KM) we first need to understand the

concept of knowledge. Knowledge can be defined from various perspectives, as shown in

Table 3.1.

Table 3.1 Definitions of knowledge

Perspective Authordistinction between knowledge, information and data Dretske, 1981a state of mind Schubert, Lincke and Schmid, 1998an object Carlsson et al., 1996a process of simultaneously knowing and acting McQueen, 1998a condition of access to information McQueen, 1998a capability with the potential of influencing the future action

Carlsson et al., 1996

These different perspectives on knowledge lead to different perceptions of KM (Carlsson et

al., 1996). The view of knowledge as a capability suggests a KM perspective centred on

building core competencies, understanding the strategic advantage of know-how, and creating

intellectual capital (Alavi and Leidner, 2001).

Strategic management literature grounds definition of KM in Penrose’s (1959) resource-based

theory of the firm (RBP). RBP claims that competitive advantage stems from firm’s resources

(Wernerfelt, 1984). RBP serves as the basis for the knowledge-based perspective of the firm

(KBP). KBP postulates that the services rendered by tangible resources depend on how they

are combined and applied, which is in turn a function of the firm’s know-how. Know-how (or

knowledge) is embedded in and carried through multiple entities including organisation

culture and identity, routines, policies, systems, documents, and individual employees

(Spender, 1996). Because knowledge assets are difficult to imitate, they produce long-term

sustainable competitive advantage (Alavi and Leidner, 2001).

In accordance with the KBP Nonaka (1991) introduces the model of knowledge-creating

company, which is based on continuous innovation through knowledge creation (see Figure

3.1). Nonaka (1991) uses Polanyi’s (1967) distinction between explicit knowledge (i.e.

knowledge articulated and specified either verbally or in writing) and tacit knowledge (i.e.

unarticulated, intuitive knowledge). Model describes knowledge creating as a continual

interplay between the tacit and explicit dimensions of knowledge and a growing spiral flow as

knowledge moves through four modes of knowledge creation on individual, group and

organisational levels (Nonaka, 1991). Socialisation allows tacit knowledge from one person to

be passed to the other. Such knowledge cannot be leveraged. Externalization is the conversion

of tacit knowledge to explicit knowledge. New knowledge is formed in a form that can be

shared. Combination is about combining discrete pieces of explicit knowledge held by

individuals. Internalisation allows individuals to broaden their knowledge base and create

new knowledge by converting explicit knowledge to tacit. Bereiter (2002) criticises Nonaka’s

(1994) model for failing to explain how exactly new ideas or understandings were created in

organisations and how they could be applied to other contexts.

Figure 3.1 Knowledge-creating company (Nonaka 1991)

To surpass Bereiter’s (2002) critique Teece, Pisano and Shuen (1997) postulate a dynamic

version of RBP. The dynamic capabilities perspective claims that due to the fact that the value

of a resource can change over time, competitive advantage comes not only from

organisational resources, but also from the firm’s capability to continually create, integrate

and reconfigure new resources. Consequently Newell et al. (2009) define KM as processes

aimed at improving the ways in which firms facing highly turbulent environments can

leverage their knowledge assets in order to ensure continuous innovation.

Herkema (2003) defines innovation as a knowledge process aimed at creating new knowledge

geared towards the development of commercial and viable solutions. The innovation is always

related to change, which can be radical or incremental (Herkema, 2003). While incremental

innovations present themselves as modifications of existing products, therefore enhancing

existing internal competencies of an organisation by providing the opportunity to build on the

existing know-how, radical innovations often put the business at risk by making the existing

knowledge redundant, however they are crucial to long-term success (Gloet and Terziovski,

2004).

4. Analysis: how Starbucks uses social media to enhance customer driven innovation

Starbucks is an international coffee house chain founded in Seattle, Washington, in 1971.

Once a roaster and retailer of whole bean and ground coffee, tea and spices with a single store

in Seattle’s Pike Place Market, has now expanded to more than 19,000 stores across 59

countries. Company, which consistently attracted around 60 million weekly visitors across the

globe (Michelli, 2007), saw its earnings drop drastically in 2008 (York, 2010).

In the times of crises companies start to innovate. According to Mintzberg’s (1991) theory of

the dialectical nature of business strategy firms are never static and are moving in one or

another direction towards efficiency or innovation given a set of market conditions. Whereas

in the times of stabile market conditions firms tend to follow the established organisational

routines, focused on achieving efficiency, it is likely that a sudden market crisis will trigger

the firm to move from efficiency to innovation. And so did Starbucks. To re-boost its

decreasing sales Starbucks started experimenting with social media services (Schultz and

Gordon, 2011).

A change in business strategy brings along a change of firm’s KM strategy (Jashapara, 2011).

When faced with crisis, firms tend to focus on personalized KM strategies, based on people,

networking within and outside of organisation boundaries, dialogue and knowledge sharing,

aimed at achieving high profits through development of innovative solutions (Jashapara,

2011). Starbucks executive personnel were afraid that unhappy customers would switch over

to their competitors without disclosing their complaints. Therefore company applied social

media as a means to connect with its customers, to engage customers in a dialogue and find

out what customers really want from a coffee shop (Chua and Banerjee, 2013). By inviting

customers to join the company in a dialogue, Starbucks shifted from static knowledge-

warehouse based approach to KM towards a more dynamic customer centric KM approach.

Most appropriate tool to extract knowledge from customers seems to be social media.

Whereas in the past companies used to deploy social media primarily as an outbound

marketing tool, lately they are starting to explore how social media can enhance business

interaction as a part of the innovation and product development process (Kenly and Poston,

2011). Newell et al. (2009) explain that firm’s ability to acquire new knowledge from external

sources depends on individuals engaging in external networks. Moreover, it is the weak ties

between organisational members and external environment that are most productive source of

ideas as they are more likely to challenge conventional thinking rather than conform to it

(Hansen, 1999). Therefore social networks are essential for the success of innovations as

innovations rely heavily on social interactions between different interests (Jashapara, 2011).

Starbucks claims that company’s engagement in social media led to alleviation of customers’

reluctance for voluntary knowledge sharing and redefinition of roles of its customers by

transforming them from passive recipients of beverages to active contributors of innovation

(Chua and Banerjee, 2013).

Starbucks uses various social networking services to connect with its customers: Twitter,

Facebook, Instagram, Google+, Pinterest, Youtube, Flickr and Mystarbucksidea.com.

However, Facebook and Mystarbucksidea.com are the two mainly being used for encouraging

customer innovation. Facebook is a social networking service that enables users to construct

and present their profiles within a bounded system, and articulate lists of other users with

whom they share connections (Ellison, Steinfield and Lampe, 2007). Mystarbucksidea.com is

a corporate discussion forum that provides dedicated avenue for Starbucks customers to

discuss organisation-specific issues (Lopez-Nicolas and Molina-Castillo, 2008).

Facebook and Mystarbucksidea.com are used by Starbucks as an interacting Ba, a space that

enables conversion of tacit customer knowledge into explicit organisational knowledge

through collaboration and dialogue, thereby enhancing customer driven innovation. Nonaka

and Konno (1998) define Ba as a common space for creating knowledge. Interacting Ba is

associated with the externalization mode of knowledge creation and refers to a space where

tacit knowledge is converted to explicit knowledge and shared among the individuals through

the process of dialogue and collaboration (for a detailed SECI model see Appendix 1)

(Nonaka and Konno, 1998). Collaboration is the ability of customers, suppliers and

employees to form knowledge sharing communities within and across organisational

boundaries in order to work together to achieve a shared business objective, resulting in

benefits to all community members (Chua and Banerjee, 2013). According to Cavusgil,

Calantone and Zhao (2003) collaboration plays a significant role in transfer of tacit

knowledge and building collective know-how, whereas sharing of tacit knowledge is at least

in two ways critical for organisations’ innovation capacity.

First, gathering tacit knowledge from collaboration partners can potentially reduce risk and

cost in innovation by ensuring a first-time-right approach, thus shortening the development

cycles end ensuring effective innovation (Cavusgil, Calantone and Zhao, 2003). Starbucks

uses Facebook to draw knowledge from their customers via posing polling questions, directly

asking customers for their personal opinions, preferences and feedback, and by monitoring

customers’ comments (West, 2012). All these activities enable Starbucks to understand

customers’ behaviours, preferences, expectations, level of satisfaction, and ways they react to

new products and changes (Chua and Banerjee, 2013), thereby reducing risk and cost in

innovation.

Second, getting tacit knowledge from customers is a valuable source for organisation’s

innovation programmes, because such knowledge can be used as a direct input for innovation

(Cardinal, Allessandri and Turner, 2001). Mystarbucksidea.com acts as a venue for customers

to ask questions and vent out their frustrations, however, its main role is to gather new ideas

from customers. The summoned ideas are submitted to public voting and those that collect the

most votes get launched (Sigala, 2012). Currently forum contains over 200,000 submitted

customer ideas, out of which 19 are in action, meaning being either under review, already

reviewed, in the works or already launched. It can be said that by treating customers as both

creators and evaluators of ideas, forum involves customers directly into firm’s product

development and innovation process.

Analysis confirmed that Starbucks has been relatively successfully using Web 2.0 tools to

extract (external) tacit knowledge from its customers and convert it into (internal) explicit

organisational knowledge. Some of customers’ ideas have even been converted into real

products and services. However, Chen, Zhaohui and Xie (2004) warn that only a fully

integrated KM structure will ensure that timely insights can be made available to be drawn at

the right juncture for making sense. Starbucks is already successfully extracting new

knowledge externally, but the 4I model claims that true strategic renewal stems not only from

organisations exploring and learning new ways, but also from exploiting at the same time

what they have already learnt. Enterprise 2.0 tools would enable Starbucks to more effectively

integrate this newly acquired knowledge into its internal organisational teaming processes and

its internal collaboration with business partners and suppliers, thereby utilizing knowledge as

a resource to its maximum benefit (Du Plessis, 2007).

5. Conclusion

In its first part the formal report critically discusses the existing organisational learning and

knowledge management theories and models. In the field of organisational learning research

report tries to overcome critiques of individual and social learning theory by presenting an

integrated 4I model of organisational learning. The report’s knowledge management

definition stems from the resource-based theory of the firm (RBP). RBP is further developed

into the knowledge-based perspective of the firm (KBP), which claims that knowledge assets

are the main source of firm’s long-term sustainable competitive advantage. Moreover, the

dynamic capabilities perspective (DCP) is introduced. DCP holds that the value of a resource

can change over time. Therefore competitive advantage comes not only from organisational

resources, but also from the firm’s capability to continually create, integrate and reconfigure

new resources. First part of the report wraps up with the introduction of the model of

knowledge-creating company and a definition of knowledge management, which views

knowledge management as a process aimed at improving the ways in which firms facing

highly turbulent environments can leverage their knowledge assets in order to ensure

continuous innovation.

Second part of the formal report applies theoretical concepts to the Starbucks exploitation of

social media. Analysis reveals that Starbucks is relatively successfully using social media, i.e.

Facebook and Mystarbucksidea.com, as an interacting Ba, a space that enables conversion of

(external) tacit customer knowledge into (internal) explicit organisational knowledge through

collaboration and dialogue, thereby enhancing customer driven innovation. However, for

Starbucks to utilize knowledge as a resource to its maximum benefit, Starbucks should also

deploy Enterprise 2.0 tools. Enterprise 2.0 tools would enable Starbucks to effectively

integrate the recently extracted new knowledge into its internal organisational teaming

processes and its internal collaboration with business partners and suppliers, thereby

exploiting it to increase the firm’s innovation capacity even more.

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7. Appendices

Appendix 1: SECI model (see Figure 7.1).

Figure 7.1 SECI model (Nonaka and Konno 1998)