Master Thesis 2015

Master Thesis 2015

Changing ways of innovating

To Be or Not To Be: How Social Media Impacts Firm Value -

The Case of Starbucks

By

Slavena Suvandzhieva

Student number: s2790297

Business Administration – Change Management

University of Groningen

Faculty of Economics and Business June 2015

1

Abstract

In the recent years, social media has grown rapidly, changing the traditional ways in which businesses interact with the external environment. Social media channels provide opportunities for companies to get closer to their customers by better understanding their needs and desires for new product or service offerings. As such, social media could be used as a strategic tool to engage with users, develop business operations and improve overall financial performance. Yet, many executives do not fully understand what benefits the use of social media can bring and struggle to create strategies to effectively exploit social media platforms. In response, we construct an integrative study of a firm`s use of three different types of social media channels and empirically test how those impact firm value. We use a large-scale panel data set from Starbuck. By conceptualizing social media strategic (SMS) capability as a firm`s ability to strategically and effectively use social media to maximize firm value, we find that information related to new product innovations developed from consumers` ideas and communicated via an OUIC channel and Twitter has positive impact on firm value. To conclude, we discuss important theoretical and managerial implications.

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1. Introduction

Over the last decade, an extremely powerful tornado called “Social Media” has smitten our world. We have entered a new era of social media and communications. It is estimated that in 2016, there will be around 2.13 billion social network users around the globe, up from 1.4 billion in 2012 ( Statista, 2015). The virtual social space has become a common platform for communication, networking and content sharing (Paniagua & Sapena, 2014, Berthon et al, 2012, Kietzamnn et al 2011). Social media has undoubtedly become a game changer that is pushing companies to rethink and adapt their business strategies in order to stay competitive and profitable. The high level of use and interaction of social media has enormous effect on the business environment: communication and collaboration create wider and wider networks for the consumers and all partners of the organizations (Georgescu & Popescul, 2015). Social media technologies allow companies to achieve new IT and organizational configurations – “affordances” (Zammuto, 2007) which affect organizational form and functions. An example of such affordances would be the so called massive online collaboration which is defined as the process by which people interact on many-to- many basis. This particular organizational affordance enables business to have access to diverse opinions and open co-creation activities. Social media platforms hold massive potential for companies to get closer to customers and by doing so, they can take advantage of increased revenue, cost reduction and efficiencies (Heller Baird & Parasnis, 2011). More and more managers are recognizing social media as an extremely rich channel for obtaining a better understanding of the online discussions and market opportunities, and for gaining feedback of their own and their competitors` products and performances (Yu, Duan & Cao, 2013, Netzer et al, 2012). As a result, most of the traded companies are actively present on some kind of social platform (Paniagua & Sapena, 2014).

3 strategists. The boom of social media inevitably changes the way companies are conducting their businesses. Hence, in order to achieve a better fit the external pressures streaming from the new opportunities and challenges that social media offer, it is essential for managers to understand how social media technologies work in order to effectively incorporate them in their business strategies. However, although it is obvious that social media is very powerful; there is a high degree of uncertainty among managers and business practitioners regarding the allocation of time and money to social media (Kaplan & Haenlein, 2010, DesAutels, 2011). This ultimately leads to poor decision making because of lack of understanding the effects of social media on business performance (Kaplan & Haenlein, 2010).

Research shows that due to the fact that many managers cannot create strategies to engage effectively with social media, businesses suffer as the opportunities and threats presented by creative customers are missed or ignored (Berthon et al, 2007). Furthermore, it is often the case that executives are not completely aware of what forms social media channels can take and how to fully utilize and exploit those (Kaplan & Haenlein, 2010). Therefore, it is essential for organizational leaders to understand the dynamics of how to use a social platform in order to sustain a corporate image and also how this will influence the financial performance (Shniederjans, 2013). Even though this topic attracts more and more attention among scholars, there is still limited amount of research that addresses the link between resources generated from social media platforms and business performance (Paniagua & Sapena, 2014).

user-4 generated content that potentially becomes the primary source of information for both consumers and businesses. Hence, it is our purpose to discover which the most effective way for a company to release corporate information and communicate with consumer is, in order to enhance business value. This leads into the following research question:

Which social media channel is most valuable to businesses with regards to firm value?

This study makes several contributions. Our work enriches the IS literature and contributes to the theoretical knowledge of dynamic capabilities, strategic use and business value of social media by conceptualizing social media strategic (SMS) capability as a firm`s ability to strategically and effectively use social media to maximize firm value. Our findings suggest that that information related to new product innovations developed from consumers` ideas and communicated via an OUIC channel and Twitter has positive impact on firm value. The knowledge generated from this study will help managers to better understand how to effectively use social media channels without wasting time and resources and build successful strategies with respect to firm value.

The paper proceeds as follows. First, we present theoretical background that will focus on crucial concepts and definitions. Afterwards, we develop and formulate our hypotheses. We then describe our methodology and empirical findings. Next, we discuss the results of our study and explain the theoretical contributions and managerial implications. Finally, we present the study`s limitations and make recommendations for further research.

2. Theoretical Background

2.1 Social media

5 social media channels that Starbucks Company uses. These are: the brand community official page (based in Facebook), the company`s official accounts for microblogging (on Twitter) and the online user innovation community (Mystarbucksidea.com). From a firm perspective, the use of social media provides many opportunities for maintaining a sustainable business. Previous research has identified various strategic benefits that the use of social media provides to organizations. Social media technologies allow businesses to connect to stakeholders in a timely manner and at a low cost (Kaplan & Haenlein, 2010), to influence consumer behavior and perceptions (Willians & Cothrell, 2000), strengthen customer loyalty and satisfaction (Bittles and Scherlock, 2011, Zhao and Lu), support new product launches (Kaplan and Haenlein, 2012) and enhance firm`s share value (Paniagua & Sapena, 2014). According to Kaplan and Haenlein (2010), the much higher efficiency of social media compared to other traditional media channels makes it necessary for companies to participate in Facebook, Twitter, MySpace and others in order to succeed in online environments.

Companies can also use social media platforms as a source for product and service innovation. An extensive body of literature and research has shown the importance of customer involvement in new product and service development (von Hippel, 2005, Baldwin et al, 2006, Poetz, 2012). In this sense, open business models which use social technologies to communicate and engage directly with customers, have become a significant source of competitive advantage (Di Gangi et al, 2010). End- users could be an invaluable source of information for companies. Von Hippel (2005) suggests that existing customers can be a rich source of innovative ideas and thus could lead to a chain of actions that might produce the right product or product modifications. Therefore a key driver of additional value by social media is that they allow the formation of online customer communities (Piller et al, 2012).

2.2 Online user innovation communities (OUICs), new product announcements

and firm value

6 solution supported by computer mediated communication” (Di Gandi & Wasko, 2009). Recently, online user communities have been more and more often used by companies in crowdsourcing as a way of open innovation for new product and service development (Chesbrough, 2003). By participating in OUICs users can engage in value creation by submitting product reviews, giving feedback, proposing new ideas, commenting and voting on others` ideas, and identifying new sources of innovation (Di Gangi, et al., 2010). In this way consumers take an active role and co-innovate together with the firm, instead of the firm developing innovations and exchanging it with their customers (Kohler et al., 2011).

Overall, research on OUICs (e.g. Di Gandi & Wasko, 2009, Dong & Wu, 2015) has shown that the use of this type of open social innovation provides benefits to businesses. Companies that use innovation communities can capture value by increasing an organization`s capacity to continuously renew its competencies and better align itself with a changing business environment (Di Gangi & Wasko, 2009). Firms participate in user communities with an objective to enlarge their base of information about needs, applications and solutions which could only be obtained from the users of a product or service. This information can be used to increase the “fit to market” of a new offering, thus reducing the risk of product flops, or to enhance innovativeness of an offering thus increasing its potential to capture the monopolistic rents which are typical for a radical innovation (Piller, 2009). Furthermore, firms that are engaging with OUICs feel that they can influence the direction of development and gain legitimacy to use the innovation (Dahlander & Wallin, 2006).

7 Research has shown the importance of new product launches on firm profitability and growth (e.g. Cohen et al, 1997, Cooper, 1998, Bayus et al, 2003). For example, based on results from an annual innovation poll by Fortune magazine, Arthur D. Little consultants conclude that innovative companies achieve the highest shareholder returns (Jonash & Sommerlatte 1999). Cooper (1998) suggests that new products are vital to the long-term success and prosperity of an organization. All of these views are also consistent with empirical event-study research that has revealed a positive relationship between new product announcements and stock return. For instance, Chaney et al. (1991) found an average daily excess return of 0.25% for new product announcement one day before and one day after the announcement. Other event studies that are examining the stock market response to information related to new product announcements also support the finding of a positive market reaction to new products (Koku et al. 1997). Sorescu & Spanjol (2008) use data on more than 20,000 new products from consumer packaged goods industries and find that breakthrough innovation is associated with increases in both normal profits and economic rents and that, on average, each breakthrough innovation in their sample is associated with an increase in firm value of $4.2 million. Pauwels et al (2003) also discover that product introductions increase long-term financial performance and firm value.

Furthermore, the innovation developed from a good idea must be introduced to the desired customers via effective information channels (Hansen & Birkinshaw, 2007). To test how effective OUICs are as information releasing channels with respect to firm value, we chose Starbucks`s OUIC – MyStarbucksIdea to be our point of reference.

2.2.1 MyStarbucksIdea

On 28 March 2008 Starbucks opened MyStarbucksIdea and was amongst the first corporate adopters of OUICs. The website has a large pool of active members who are highly engaged in online discussions and information updates. The success of this social platform has also been marked when it became a winner in 2008 Forrester Groundswell awards (recognizing excellent and effective use of social technologies to advance an organizational goal) for Embracing1_{. For}

these reasons MyStarbucksIdea is an attractive context to collect data for this study.

8 MyStarbucksIdea is an online user innovation community where people are can post their ideas about new products and/or services and also vote and comment on other`s ideas. Users are invited to participate in online dialogues, share information and communicate with each other. Ideas are submitted within the following three categories: product ideas (e.g. coffee, tea, food); experience ideas (e.g. payment and ordering methods) and involvement ideas (e.g. social responsibility, building community). Idea partners will evaluate the ideas and those supported by management will be developed into new products/services and then launched to the marketplace. OUICs are also used to release innovation- related information in order to let customers know about the new product, service or process launches. Starbuck`s staff operate a corporate blog for informing customers which ideas are launched and which are under implementation or review. For example, so far Starbucks has announced more than 260 innovation launches via its OUIC – MyStarbucksIdea, including new coffee drinks and other beverages, food, atmosphere and shop locations, merchandise, music, membership cards, ordering, payment and pick up, social responsibility and international business ( Dong & Wu, 2015).

In short, Starbucks uses MyStarbucksIdea to collect user-generated ideas and then develops and launches the good ideas into tangible innovative products and/or services to the marketplace.

2.3 Twitter Microblogging and firm value

Microblogging services have risen in popularity as new applications over the past few years (Zhao & Lu, 2012). These services are communication channels for people to broadcast short text (sometimes with photos) about what they are reading, thinking about and experiencing in their daily lives (McFedries, 2007). These applications are considered to have enormous potential for various purposes, e.g. online word-of-mouth marketing, improving teaching and learning processes, and implementing a formative evaluation of courses (Jasen et al., 2009, Stieger & Burger, 2010). Microblogging platforms provide a more flattened and efficient way for obtaining and distributing information as they enable people to directly collect the public`s opinions and behavior toward firms (Liu et al., 2015).

9 relationship between following and being followed requires no reciprocation (Liu et al., 2015). A common practice of responding to a tweet has turned into a well-known markup culture: RT stands for retweet, “@” followed by a user name addressed the user, and ‘#” followed by a word denotes a hashtag. This well-known vocabulary together with a strict limit of 140 characters per post make Twitter a real-time information system where users can learn what is currently happening in the world, share information instantly and connect with other people and businesses. With more than 300 million monthly active users and 500 million tweets sent out per day2_{, Twitter presents a great opportunity for businesses to reach out their existing and potential}

customers. Twitter has proven to be an extremely valuable tool for Starbucks. The company is amongst the ten3 most popular companies on Twitter and also the fifty4 best brands to follow on Twitter.

Previous researchers from different fields such as finance, economics, information systems have studied the effectiveness of social media information over businesses` activities and their financial performances. For example, Bollen et al. (2011) found that collective mood states on Twitter are correlated with the value of the Dow Jones Industrial Average. Luo et al. (2013) revealed that social media metrics are significant indicators of firm equity value. Sul et.al (2014) collected data from Twitter posts about S&P 500 companies and discovered that the positive or negative emotions of tweets about a particular company are significantly related to that company`s stock returns.

Microblogging platforms play an important role in information dissemination (Alexander & Gentry, 2014). Prior research has demonstrated that customer and public attention, such as website traffic (Luo & Zhang, 2013) and consumer visit frequency (Rishika et al., 2013), have a positive relationship with firm stock performance. It is in the interest of this study, to discover if a firm`s daily Twitter activities influence positively firm value. We would like to gain understanding of the strategic use of Twitter, such that will lead to increase in firm value. For this aim we are exploring Starbucks`s daily activities via two Twitter accounts - @Starbucks and @MyStarbucksIdea

2 _{Source: About Twitter, 2015 : https://about.twitter.com/company}

3 _{Source: CNBC, The Top Ten Companies on Twitter: http://www.cnbc.com/id/36421561/page/4}

4 _{Source: Business Insider, The 50 Best Brands TO Follow on Twitter:}

10 2.2.3 @Starbucks and @MyStarbucksIdea

The Starbucks`s official and global Twitter account is under the name @Starbucks. The company`s tweets represent interactive posts with photos and videos, covering different topics some of which include products and services, in-store experiences, current media and entertainment events. Under the section “Tweets & Replies”, the company responds to specific Twitter users who have mentioned Starbucks on their own timeline (by writing @Starbucks). This can include answering to customers` questions, negative feedback and complains, commenting on users` tweets and saying “happy birthday” to their followers. For example, a user “@martinpigg” posted: “@Starbucks I`m regular customer and a barista suggested i get a gold card. Don`t have a Starbucks card. Is the program still alive?” to which Starbucks replied: “@martinpigg It is! Go here to register your card: http:/starbucks.com/card… after 30 stars, we`ll mail you a gold card”.

Along with the original Starbucks account, the company also runs @MyStarbucksIdea where new innovation launches are announced and discussed with followers. The content posted from this account is exclusively related to new products, services and processes. @MyStarbucksIdea is linked to the OUIC- MyStarbucksIdea.com and consequently releasing information related only to innovations.

2.4 Facebook Brand Communities and firm value

11 specific brand (Zaglia, 2013). A recent study conducted in the United States by Business Wire (2012) reveals the top five reasons why people become fans of a brand on Facebook:

1 Being a consumer of the company (58%)

2 Seeking to receive discounts and promotions (57%) 3 Showing others that you like/support the brand (41%) 4 Being the first to have information about the brand (31%) 5 Having access to exclusive content (31%)

Table 1, Adapted from Pereira et al, 2014

In her study Zaglia (2011) suggests that key motivational reasons for joining a brand community are: passion for the brand, social relation to others, reception of information tailored to specific members` needs, entertainment, and enhancement of one`s social position. She also finds that a brand fan page, as opposed to brand fan group, seems to embody a weaker form of a brand community where social relations and the support of peers are of less importance.

Brand communities provide many benefits for the brand and marketers which include interacting with highly devoted consumers and obtaining valuable market research from consumers for new product development purposes (Schau et al., 2009 Andersen, 2005). In terms of the effects of Facebook brand communities on firm value, a recent study (Plangger, 2012) examined the effects of online brand communities on firm value and found a positive relationship between them two. However, none of the coefficients of Facebook variables were significant.

Our study aims to reveal if a Facebook brand community’s metrics will affect firm value and also what are the strategic benefits of having brand community on Facebook. To achieve this, we examine Starbuck`s official Facebook page.

12 timeline. One can easily notice that the posts on the page are not updated all that often and also Starbucks`s does not engage into conversations with customers or reply to questions or/and complains.

3 Hypotheses Development

3.1 Social Media Strategic (SMS) capability

The theory of dynamic capabilities offers a coherent theoretical basis that explains the “firm`s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments” (Teece et.al. 1997). The role of dynamic capabilities is to enhance organization`s capacity to change effectively, and eventually to sustain its corporate competitive advantage. In line with this notion, social media could be a specific instrument through which organization can maintain-even increase dynamic capabilities (Bondarouk & Olivas, 2013). As we already discussed, social media appears to have changed the way people interact with each other, within and outside organizations. Therefore, it is essential for managers to incorporate social media into their business strategies.

13 recommendation – congruity, which directs firms to develop strategies that are congruent with, or suited to, different social media functionalities and the goals of the firm. Further they advise that companies should focus their social media strategy on increasing customer happiness (e.g. how effectively the customers complains and issues are handles) and customer input (e.g. suggestions for improving a product or services).

Drawing on the compatible perspectives for dynamic capabilities and congruity we theorize one new capability: social media strategic (SMS) capability which refers to a firm`s ability to strategically and effectively use social media to maximize firm value.

3.2 SMS capability and firm value

Firms can use different media channels for different purposes such as building trust in brand, acquiring customer feedback, promoting new products, gathering consumer ideas for improvements in products and services. This study examines a firm`s use of three different social media channels. Our purpose is to discover which channel and why has the biggest positive impact on business value in order to help companies enhance their SMS capability. In general, we consider that social media is a good predictor of firm value as is provides investors with access to first-hand information faster than any other sources. However, it is important to note that there are different types of social media channels, serving different needs. In this study, we investigate three social media channels: OUIC, Twitter and Facebook. Considering their characteristics and applicability which were discussed earlier, we split them into two categories: 1) information dissemination channels and 2) social network channels and respectively OUICs and Twitter fit into the first category and Facebook into the second one. This being clarified, we then theorize that information dissemination channels can develop a firm`s SMS capability while network channels cannot. To put it simply, OUICs and Twitter have a key role in improving SMS capability and in turn firm value, whereas Facebook does not play a significant role in this process. Therefore, depending on firm`s SMS capability, investors will be able to timely assess the firm`s product and brand performances and ultimately predict future business value.

3.2.1 OUICs

14 information appears, there will be no movements in stock prices. However, if new information such as new product announcements is released, it will change market expectations and impact firm value. If investors accept the new product launch as something positive (e.g. their expectations are exceeded), the stock price will increase to reflect the expected net sum of future, discounted cash flows resulting from the new products (Wittink et al., 1982). Therefore we can expect that new product launches will have positive effect on firm value.

Furthermore, weare interested to find out if innovations derived from user-generated ideas and announced on OUICs will yield positive effects on firm value. As we already mentioned, in order to realize economic value, an organization must introduce the innovation developed from a good idea to the consumers via effective information channels (Hansen & Birkinshaw, 2007). Investors honor positive marketing resources that are critical to promote and launch new products to customers (Lee & Chen, 2009). We consider that OUICs are effective information channels for new products launches due to a few reasons: 1) they are specifically designed platforms that facilitate consumer collaboration and communication related to innovation ideas; 2) customers are engaged in the innovation process and want to see tangible results from their ideas 3) the new user-generated product innovations that are introduced indicate that the company listens to its customers and values their opinions and therefore the new product introductions will increase the demand of the firm`s products which is a positive signal for investors. We consider that a firm`s SMS capability will be reflected and enhanced when the firm makes new product announcements via its OUIC channel. We then expect that new innovation announcements via an OUIC channel can increase firm value. Thus we formulate the following hypothesis.

H1. A firm`s SMS capability that results in daily posts related to new innovation launches made

on the firm`s OUIC channel have positive effect on firm value. 3.2.2 Twitter

15 activities, companies can affect their customers` behavior and intentions, which in turn will influence firms` sales (Zhu &Zhang, 2010, Lee et al 2011 Phang et al, 2013). Also, considering Twitter`s functionalities, this social media platform has proven to be an effective mechanism for creating viral buzzes reaching huge number of people. The spread of information is happening instantly and can therefore positively or negatively influence a firm`s reputation. Previous research on social media has also revealed that public`s social media activities, not those of the investors, can be used to predict stock prices. This is so, because investors` emotions can be influenced by public sentiments and hence their investment decisions are also altered (Sul et.al 2014). Also, we have to take into account that the spread of information on social media platforms is much more efficient than traditional ways (Liu et al., 2015). All of this leads us to believe that a firm`s SMS capability which is related to the firm`s daily activities on Twitter can positively influence firm value, especially if those activities are related to new product announcements. Therefore we formulate the following two hypotheses.

H2a. A firm`s SMS capability that results in daily posts made on Twitter have positive

association with firm value.

H2b. A firm`s SMS capability that results in daily posts on Twitter account which is related to

the firm`s OUIC, have greater positive effect on firm value, compared to posts on the original Twitter account of the firm.

3.2.3 Facebook

16 Taking into account the general concept of brand community and customers` motivations to participate in a brand community which have been indicated earlier, we can conclude that the main purpose of Facebook brand community also comes down to fans networking and sharing similar interests. An online brand community`s core factor is the brand itself but ultimately they exist and persist due to the relationships among members (Jang et al, 2008). Brand communities on Facebook operate with a high order objective to mainly maintain brand loyalty and facilitate a virtual space where customers can share their opinions and experiences with each other. In this line of thoughts, Starbucks`s Facebook page aims to connect brand lovers and spur discussions but not to exclusively release information about new firm innovations. As we already discussed new product announcements should have positive impact on firm value, which does not seem to be not the primary goal of Starbucks`s Facebook page. Furthermore, as discussed earlier, considering the nature of Facebook as social network tool, we do not believe that a firm`s SMS capability is fully reflected in how it’s Facebook brand community functions. All being said, we thus do not expect that posts on a brand fan page will affect firm value. Hence, we formulate the following hypothesis.

H3. A firm`s SMS capability that results in daily posts made on the firm`s official Facebook page

are not associated with firm value.

4. Methodology

4.1 Data

Starbucks is highly relevant to the aims of this study because the company has strong presence on multiple social networks including those that are in the scope of this research, namely online user innovation communities, Facebook and Twitter. As the largest coffeehouse company around the globe, Starbucks is listed amongst the world`s most valuable brands and innovative companies and is amongst America`s best employers according to Forbes5. The company is also ranked as the fifth most admired company in the world by Fortune Magazine6.

The data for this study was collected from multiple sources: (1) MyStarbucksIdea website (Figure 1), (2) Twitter – @Starbucks (Figure 2), and @MyStarbucksIdea (Figure 3), (3)

5 _{Source: Forbes, 2015 Ranking: http://www.forbes.com/companies/starbucks/}

17 Facebook – Starbucks(Figure 4), (4) stock return data from the Center for research in Security Prices (CRSP) database, and (5) newspaper information from the Lexis-Nexis database. We then constructed a comprehensive panel data set by merging all the gathered data. We ended up with 705 daily observations.

4.2 Research design

To test our hypothesis, we implement event study methodology. As we already mentioned, efficient market hypothesis theory suggests that firm`s stock price reflects immediately the effect of an event on firm value (Fama, 1970). It is underlined by two basic assumptions: (1) all investors are rational, and (2) stock markets are information – efficient. According to the efficient market hypothesis, stock prices are driven by new information (news) rather than present and past prices (Bollen, 2011). Thus, the event study methodology is appropriate for this study as is allows us to test the effects of new information on firm value.

Using financial market data, an event study has been largely used to measure the effect of a specific event on the value of the firm. For example, in accounting and finance research, event studies have been used to capture the impact of mergers and acquisitions, earning announcements, issues of new debt or equity, and announcement of macro-economic variables such as the trade deficit (Mackinlay, 1997). In order to conduct an event study, researchers first have to identify two important things: the event of interest and the event window. Event window is the period over which the stock prices will be examined. It is usually expanded to multiple days including the day of the announcement and the days before and after the announcement because some investors might know about the event slightly earlier or later (Dong & Wu, 2015).

18 considerations are defining the null hypothesis and determining the techniques for aggregating the individual firm abnormal returns.

In general, the efficient market hypothesis proposes that all the available information is “fully reflected” by the stock prices in a timely manner (Fama, 1970). Under the semi-strong version of the (EMH), investors in the stock market will react timely to good or bad news about the firms by selling and buying the stocks of the firms in order to protect their wealth as efficiently as possible. From this, it follows that investors will adjust their behavior in accordance with the public information that becomes available on social or traditional media. These actions will in turn lead to changes in the firm value on the financial market.

4.3 Dependent variable

As discussed before, public information related to firm`s activities on social media can impact the firm value. Therefore, the business value of the three social media channels that we study – MyStarbucksIdea, Twitter and Facebook could be assessed by the abnormal returns over a relatively short period of time around the company`s actions on these channels. We capture the change of firm value by the Cumulative Abnormal Returns (CARs) in a short event window, which is calculated by the market model7. We use a 3-day window to calculate CARs from one day before and after the event as the following equation shows:

𝐶𝐴𝑅_𝑡𝐹𝐼𝑅𝑀 _{= ∑ 𝜀} 𝑡 𝑡+1 𝑡−1

The residuals of 𝜀𝑡 are the daily abnormal returns of the stock on day t. The daily stock returns

data for Starbucks are collected from the CRSP database. When the database was accessed, the last available stocks return data was available until 31st of December, 2010.

7 _{We estimate an OLS model as: 𝑅}

𝑡𝐹𝐼𝑅𝑀= 𝛽0 + 𝛽1 𝑅𝑡𝑀𝐾𝑇+ 𝜀𝑡 where 𝑅𝑡𝐹𝐼𝑅𝑀 is the actual return of a firm`s stock

19

4.4 Independent variables

We use the firm`s activities around the three explored social media platforms as independent variables. We could explore the business value of these social media channels by testing the effects of the independent variables collected from MyStarbucksIdea, Twitter and Facebook on the abnormal returns of Starbucks stocks in event windows. If any of the variables increase firm value, we should observe greater CARs in the event window days when the specific event occurred. Table 2 presents description and data sources of the independent variables used in this study. Descriptive statistics and correlations of the variables are indicated in Table 4.

4.5 Control variables

20 Table 2 – Description of Independent Variable

Table 3 – Description of Control Variables

Variable Description Source

Number of launches The number count of new innovation launches announces in MyStarbucksIdea per day

MyStarbucksIdea

Number of Starbucks Tweets

The number count of Twitter feeds posted per day

@Starbucks Twitter account

Number of

MyStarbucksIdea Tweets

The number count of Twitter feeds posted per day

@MyStarbucksIdea Twitter account

Number of likes The number count of Facebook likes on firm`s posts per day

Starbucks Official Facebook Page Number of comments The number count of Facebook comments on

firm`s posts per day

Starbucks Official Facebook Page Number of shares The number count of Facebook shares of

firm`s posts per day

Starbucks Official Facebook Page

Variable Description Source

News dummy 1 indicates that major US newspapers released news about innovation launches in a specific day; 0 otherwise

LexisNexis database Text message 1 indicates that a specific post includes written text message ; 0

otherwise

Starbucks Official Facebook Page Link to

MyStarbucksIdea

1 indicates that a specific post includes link to MyStarbucksIdea website ; 0 otherwise

Starbucks Official Facebook Page Link to

Starbucks.com

1 indicates that a specific post includes link to the official Starbucks website ; 0 otherwise

21 Table 4 – Descriptive statistics and correlations

Figure 1 – Screenshot of MyStarbucksIdea.com

22 Figure2 - Screenshot of Starbucks Coffee Twitter page

Figure3 - Screenshot of @MyStarbucksIdea Twitter page

23

5. Results

To test our hypotheses, we used linear regression analysis. It is one of the most widely used techniques for analyzing multifactor data because of its conceptually logical process of using an equitation to express the relationship between a variable of interest and set of related predictors (Montgomery et al, 2012). We aim to explore the relationship between business value and the firm`s activities on three social media channels and therefore a regression analysis is deemed suitable for this purpose.

By using this type of analysis, our goal is to observe whether the regression coefficients are statistically significant. We estimate the control model and the full model. Prior the analysis, the distribution of the variables was checked on whether they meet the assumptions of regression analysis (Cohen & Cohen, 2013). They were found to match those assumptions. Standard errors were used in all analyses. Furthermore, we ran diagnostics to examine the multicollinearity by checking the variance inflation factor (VIF) in the regression analysis. The VIF values were within the acceptable range of 10 (Knutner et al., 2004).

24 effects of Facebook brand community`s metrics on CARs and our results proposed that number of Facebook likes, comments and shares had statistically non-significant effect on CARs. Thus H3 is supported. H3 posited that a firm`s SMS capability that results in daily posts made on the firm`s official Facebook page are not associated with firm value. Finally, we found that our control variables were non-significant, suggesting that they had no influence on CARs in event windows.

Table 5 – Hypothesis testing

Note: Dependent variable is CARs. Unstandardized coefficients are reported. Standard errors are in parentheses.*p < 0.05.

Control Model Full Model

Number of launches H1: + 0.002*

(0.001)

MyStarbucksIdea Tweets H2a: + 0.000*

(0.000)

Starbucks Tweets H2b: + 0.000

(0.000)

Number of likes H3: .n.s. -1.962E-5

(0.000)

Number of comments 2.035E-6

(0.000)

Number of shares 8.795E-6

25

6. Discussions

6.1 Main findings

The past decade has witnessed dramatic change of the media landscape with digital social media channels for e.g. crowdsourcing, word-of –mouth, networking which are complementing and even replacing traditional media channels. With the increasing popularity of social media technologies, managers are recognizing the value of exploiting social media to improve and ultimately transform business performance (Divol et al.2010). Engaging with users on social media platforms is becoming a key business strategy for organizations (Kaplnan & Haenlein, 2010). Therefore, effective use of social media requires business leaders to develop specific skills and capabilities in order to adapt to the fast-changing market environment. In this study, by drawing on the theory of dynamic capabilities and the notion for congruity we conceptualize a firm`s strategic use of three different social media channels and examine their business value. To the extent of our knowledge, this comparative study is amongst the first attempts to systematically theorize and empirically test the effects of a firm’s strategic use of social media channels on business value. Overall, our findings suggest that information related to new product innovations communicated via an OUIC channel and Twitter positively impacts firm value. Also, our findings confirm that information dissemination channels such as OUICs and Twitter can develop a firm`s SMS capability, whilst social network platforms such as Facebook, cannot. Therefore, to answer our research question – “Which social media channel is most valuable to businesses with regards to firm value?”, we deem that firm`s OUIC and Twitter account announcing new product launches developed from consumers` ideas, are considered to be such channels.

26 implementation or review which proved to have positive relationship with firm value. Therefore an OUIC is a significant factor in developing a firm`s SMS capability.

In terms of Twitter and Facebook, Paniagua and Sapena (2014) propose that Twitter is a more powerful tool than Facebook to enhance business performance, which is also in line with the findings from this study. The authors explain this difference by the nature of the two channels – Twitter is relatively simple microblogging service via which interactions are usually based on mutual affinities whilst Facebook is complex networking tool via which relationships are built on friendship or acquaintance. Twitter has become very popular service that generates value for firms due to the specific features of microblogging, such as ambient awareness and a push-and-pull communication format (Kaplan & Haenlein, 2011). Again, Twitter is also important for enhancing a firm`s SMS capability. In contrast, a recent study on Facebook suggested that while users are willing to connect to brands on Facebook, they do not seem to interact or to frequently share brand content themselves (Pereira et al, 2014). These assertions support our findings that Twitter is better predictor for firm value than Facebook.

6.2 Theoretical Contributions

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6.3 Practical Implications

The empirical findings of this study also suggest important practical implications for managers and business practitioners in determining which social media channels are appropriate to enhance firm value. The main insight form our research is the linkage between social media and business value. Empirical evidence suggests managers can increase firm value by releasing information related to new products via an OUIC channel and/or Twitter. However, we should emphasize one very important fact - these new product innovations are developed from user –generated ideas. It follows that, in order to positively affect firm value and enhance their SMS capability, managers should first of all implement an OUIC, preferably with similar design to MyStarbucksIdea. In this way, they will be able to gather customers` ideas, then effectively select the best ones and transform them into new products, services or processes. The last step would be to introduce the developed innovations to users by making announcements on the OUIC channel and Twitter. In this way, they will expand a firm`s SMS capability. The innovations developed and presented thorough this process proved to be valuable and rewarded by investors in the financial market (Dong & Wu, 2015). The bottom line is that managers should strive to develop and improve their SMS capability by being actively present on different social media platforms as this will be echoed in an increase in business value which is the ultimate goal for every organization.

7. Future research and limitations

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