Case 2: Starbucks
Brittany Boilard
November 8, 2014
Introduction
Company History
Founded in 1971 by Jerry Baldwin, Zev Siegel and Gordon Bowher, Starbucks started as a single café
selling whole bean coffee in Seattle’s Pike Place Market. In the next 11 years it grew to five stores, a small
roasting facility, and had begun selling wholesale to local restaurants. During this time, the founders also
hired Howard Schultz as manager of regional sales and marketing. After a trip to Italy, Schulz became
obsessed with the idea of providing an Italian coffee bar style experience to customers. The founders did
not share this vision however, and resisted for a few years. In 1987, the founders sold Starbucks to Schulz
for $4 million. During the first three years of his ownership, Schulz hired top executives and lost money. He
was dedicated to the idea of slow growth with a solid foundation; Starbucks did not want to sacrifice long
term integrity and values for short term profit. The dedication paid off, and in the year 1991, Starbucks
increases sales 84% and finally turned a profit. Sticking with to their values has allowed for Starbucks 20
year rise to dominance. During the recession in 2008 and 2009, Starbucks was forced to close 900 stores.
From 1993 to 2013 Starbucks experienced an average growth rate of 28% a year. In 2013, they generated
$13 billion in annual revenue, and were the world leaders in specialty coffee retail. Starbucks has 200,000
employees working in 17,000 locations and owns an assortment of coffee and drink brands. The US market
is reaching saturation and Starbucks is looking abroad for growth.
Industry Analysis
The specialty coffee industry, of which Starbucks is a part of, accounts for 37% of all coffee cups consumed
in the US and 50% of all coffee revenue. The specialty coffee industry has been growing in the US since
Starbucks started expanding in the 1990’s.
The US is the largest buyer of unroasted beans, but it is expected that Brazil will take over this position by
the year 2016. Worldwide, independent coffee shops account for majority of specialty coffee sold, with
large chains making up the minority. However, in the US, Starbucks sell 50% of specialty coffee purchased
in cafes.
Specialty coffee shops such as Caribou Coffee and Peet’s Coffee & Tea offer a similar experience as
Starbucks but operate on a smaller scale. Both have the potential to grow and challenge Starbucks in many
of their markets. Larger chains Dunkin Donuts and McDonalds have recently started targeting the specialty
coffee market with lower prices. This could pose a threat to Starbucks as many Americans are price
sensitive. International markets have entrenched competition and it can be difficult for new companies to
attain a foothold in the market. Starbucks has begun to experience this in foreign markets and needs to
explore the best way to move forward with international growth.
The specialty coffee industry is characterized by high quality coffee that customers are generally willing to
pay more for. Historically the market has been dominated by small local shops; for a large chain to succeed
they need to be able to consistently replicate a local coffee shop environment for its customers. How large
companies are perceived in the market, plays an important role in customer’s purchases. Customers are
looking for key features when purchasing specialty coffee, like quality, along with the experience they have
while purchasing it.
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Starbucks has positioned itself as the US market leader for the specialty coffee industry. It has created an
exceptional cup of coffee, accompanied by exceptional service, with a localized café experience. Starbucks
has set the standard for both large and small coffee shops to compete with. This market positioning has
devolved consumers that are looking for the Starbucks experience when purchasing their coffee. The
Starbucks experience is hard for other companies to recreate, especially large established chains. This
competitive advantage has helped the company’s steady 20 year growth.
Internal Analysis
Strengths
Starbucks has many outstanding strengths that has allowed it attain 50% market share in the US. The first
of which is positive relationships with suppliers. Historically, American coffee companies have not been well
liked by coffee growers; however Starbucks has managed to have a positive impact on the industry. This has
allowed them to purchase the highest quality beans, typically bought by other nations. Purchasing large
quantities also allows Starbucks to achieve economies of scale. Starbucks has defied the industry by
roasting its own beans. They have decided to do this to maintain the highest quality and consistently
possible for their coffee.
Starbucks has decided it is important that their café locations be highly visible. While this expense is high,
and has prevented them from heavily marketing; being in visible locations has allowed Starbucks to take
advantage of convenience for customers and the implicit marketing that comes with the locations. The look
and feel of the stores is also strength for the company. Starbucks has been committed to making its cafés a
place where customers want to go and spend time. Each location is also customized to its surroundings
helping to attain a local feel. Starbucks has also recently been experimenting with different café formats,
utilizing these will allow it to serve each market type properly.
Serving a quality product has been Starbucks greatest and most consistent strength since it was founded. It
has allowed the company to form a brand reputation that customers know and rely on. Their reputation for
quality has also allowed Starbucks to charge a premium price for their products. Along with having a quality
product, Starbucks is constantly innovating their menu, and allows patrons to customize their purchase.
In addition to a quality product, Starbucks is known for its superior customer service. The combination of
quality products and customer service has resulted in high customer loyalty. This is hard to achieve in an
industry serving a commodity. Good public perception has also played a role in Starbucks rise to the top.
They are known for being a fair employer and for buying fair trade coffee beans. Younger generations value
these traits in companies and prefer to buy from them.
Treating employees fairly has helped achieve high employee loyalty and performance. Starbucks benefits
from low employee turnover and high customer responsiveness. This has helped the company save money
while delivering a great service experience to its customers.
All of these strengths helped Starbucks build an iconic ubiquitous brand, their greatest intangible resource.
Its brand is well developed and known across the country and the world. It has created loyal customers and
allows Starbucks to enter new markets with a positive image to build from. Its size has also allowed the
company to reach economies of scale, which is very important when selling a higher priced commodity. All
of Starbucks strengths together have given them a sustained competitive advantage.
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Weaknesses
While it doesn’t have many, Starbucks does have a few weaknesses, and areas in which it could improve.
Starbucks has a lack of food options; this sends customers to competitors when they need both coffee and
a meal. While they have recently tried to improve their food, there is still room for growth. Offering a wider
variety of food would allow the company to continue growing in the US market, while satisfying customer
needs.
Starbucks does not heavily advertise or educate consumers on their products; they have instead chosen to
invest in highly visible locations. Customers that are not currently willing to pay a higher price for their
coffee may be persuade otherwise, if they knew that Starbucks used quality fair trade beans.
Starbucks has high fixed cost that its competitors do not incur. Their commitment to employee training and
compensation is a high cost that must be considered when comparing companies. Starbucks also sells its
coffee and other products at a high price point compared to its competitors. This can sometimes price them
out of a market and decrease customer loyalty. It also makes Starbucks vulnerable to downturns in the
economy when consumers are less willing to pay for a high priced specialty product.
Because of the large drink variety and customization options paired with higher customer service,
Starbucks can have a longer customer wait time than its competitors. While the company and many
customers accept this trade off, not all customers do and choose faster competitors.
Starbucks is also nearing US market saturation, it will be hard for Starbucks to keep up its consistent
growth rate. They will have to offer new products and/or expand to new markets to continue growing.
Starbucks is also dependent on Schultz for its future vision. During the short time he stepped down as CEO,
the company’s vision faltered. Investors may worry that the company is only valuable and stable with
Schultz at the helm.
External Analysis
Opportunities
Based off of its strengths and weaknesses, Starbucks has some opportunities to consider moving forward.
Increasing their advertising budget and using it to support customer knowledge of their products could help
increase sales. Customers might be willing to pay for a more expansive Starbucks coffee, when they
understand the difference they are paying for.
Another opportunity for Starbucks is diversifying its food selection. Having bought La Boulange in 2012,
they have begun this process but must go further. Many customers are looking to buy more than just a cup
of coffee; they are looking for a quick breakfast or lunch. Those customers are likely to choose competitors
such as Dunkin Donuts and McDonalds. Not only can customers get meals at these establishments they will
also pay less in the process. Starbucks should consider offering a similar food menu as Dunkin Donuts, with
the addition of the quality that Starbucks is known for.
Starbucks has started to implement a wide range of café formats. While the US market is almost saturated,
utilizing different café formats could help reach customers that Starbucks traditional format is not suited
for. Of these new formats, the most notable is drive-through; while not important in major cities, millions of
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Americans do not leave their car during the morning commute. Opening more drive-through accessible
locations will allow Starbucks to serve this market.
Starbucks can also look to expand product sales with K-Cups and other Starbucks branded items. Many
coffee companies sell every aspect of coffee necessities, branded under their name. Starbucks could
branch into making their own coffee or espresso makers. They could also sell flavored syrups and other
customer coffee addition favorites. Starbucks should be careful however, if customers can produced the
same taste at home as they get in stores; some may choose to exclusively make their favorite dinks at home
for a lesser cost.
As previously mentioned international markets are a big part of Starbucks future growth. They must
consider whether they will open corporate stores or license their brand internationally. Both come with their
own benefits and risks, but this risk has to be taken to further the company. Starbucks should initially focus
on emerging markets in Brazil, India and Vietnam. Once they have conquered these markets the knowledge
they get will help them move forward internationally.
Finally, Starbucks should be developing a way to become involved in its customers’ everyday health and
wellness. This can take the shape of many different products or services. Making Starbucks an everyday
stop for products other than coffee would increase their customer base and allow them to grow in US.
When developing this idea Starbucks must keep in mind who their customer is, what their needs are, and
how much they are willing to pay to fulfill those needs.
Implementing some of these opportunities will allow Starbucks to continue to grow in the US. Being able to
grow domestically will greatly benefit the company as it tries to successfully enter new foreign markets.
While foreign markets are the future of the company, it will take quite some time before they have a
foothold. It is important for them be thinking about expanding both at home and abroad simultaneously.
Threats
The specialty coffee industry has very high rivalry. Coffee is a commodity product that is not highly
differentiated. The industry has a few large key players along with thousands of small local cafés competing
for customers limited coffee needs and budgets. Dunkin Donuts and McDonalds are starting to offer high
quality coffee at a much lower price compared to Starbucks. This could pose a threat to Starbucks and their
high price point. They are also competing against local shops, customers are generally willing to pay more
to support local business, but do not feel the same way towards corporate brands. International brands
could also enter the US market at any time. Customers are again willing to pay more for foreign products
because of perceived value, even if it is not a superior good.
A downturn in the economy could be difficult for Starbucks. Specialty coffee in Starbucks price range is a
luxury for most and is one of the first things to go when the budget gets tight. In the last recession,
Starbucks was forced to close 900 stores and refocus its brand. While they learned from that experience, a
downturn in the economy would still negatively affect the company.
Competition for buying quality beans could also be a threat in the future. With more American palettes
wanting high quality and taste, more companies will be looking to meet this demand. The international
market for specialty coffee is also expected to grow, which will further drive up demand for high quality
beans.
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Low customer switching cost, is a constant threat to any company in the specialty coffee industry.
Customers have many options when choosing their beverage and experience no switching cost when
changing brands. The industry also has low barriers to entry, and is easy to enter on a small scale. While it
would be hard for a new company to complete with Starbucks, the collection of new local café does pose a
threat to Starbucks.
Starbucks must do what it can to minimize these threats, if not they leave themselves vulnerable to
potential risk. While one of these factors alone would not compromise the company, a combination of these
and other unforeseen threats could.
Starbucks’ Strategies
Functional Level Strategy
Starbucks employs many functional level strategies to run effectively. At its core, Starbucks employs mass
customization to serve its customers and differentiate itself from competitors. Starbucks has a large drink
selection that can be customized in countless ways, allowing customers to create a drink that perfectly
meets their taste and needs. Mass customization along with total quality management has been the
cornerstone of the Starbucks philosophy. Total quality management has been important for Starbucks, its
employees, and overall customer experience. As Schultz said “we are selling an experience not just a cup of
coffee.” Starbucks is fulfilling not only customers’ needs for quality caffeinated beverages; they are also
fulfilling the need for a comfortable atmosphere with friendly service. Because of this employees receive
extensive training to ensure consistent products and service.
Additionally, Starbucks employs self-managing teams to train employees to handle customer problems on
their own, without needing the help of managers. To do this, employees undergo extensive training and
empowerment lessons. The goal is for employees to satisfy customers’ needs quickly and easily, confident
that they handled the situation correctly. This cuts down on service time and keeps customers happy.
Finally, Starbucks also uses a just-in-time inventory system to keep products fresh and cut down on product
storage. They have a much lower than industry average of inventory turnover at just 5.36 days. Fast
inventory turnover allows for quick return on product cost.
Business Level Strategy
Starbucks business level strategy is broad differentiation. They have managed to differentiate a commodity
product in a high rivalry industry. By differentiating a commodity they have created unique products that
customers can only attain at Starbucks, thus creating brand loyalty. Brand loyalty in a commodity industry
is very important because Starbucks relies on repeat purchases. Their business level strategy is perfectly
aligned with their market positioning. They have also differentiated themselves by providing high quality
service; something that its larger competitors are not known for. Starbucks café atmosphere and setup is
also unique and differentiates itself from the competition.
Initially when Starbucks entered the industry their business model was unheard of. When they started
developing Italian style coffee bars in the US they were alone in their endeavor and thus were following a
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blue ocean strategy. When they started in the 1980s the specialty coffee industry was undeveloped in US,
Starbucks forged the path for the current day industry.
Conclusion
Starbucks vision has allowed them to grow into the company they are today. They created the specialty
coffee industry in the US, and have set a high standard for others to live up to. They are secure in their
standings and market positioning but must stay on the cutting edge to keep their competitive advantage.
Starbucks has many strengths including their quality product, high customer service, and highly visible
location. These strengths have allowed Starbucks to build an iconic ubiquitous brand that along with other
strengths has given the company a strong competitive advantage. These strengths have allowed Starbucks
to minimize and overcome their weaknesses. With continued growth and development Starbucks can turn
many of their weaknesses into future opportunities. Those that cannot be changed such as their high price
point, is contained by their quality and customer service reputation. While Starbucks will always face
threats in the market such as growing competitors and downturns in the economy, they have the resources
and capabilities to overcome challenges. Starbucks has also developed functional and business level
strategies that align with their market positioning and goals. Utilizing strategies that position Starbucks
properly in the market, has been essential to their success. Starbucks can use their competitive advantage
to stay the US market leader in specialty coffee, while growing their international presence, and could
become the international market leader in the future.
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Appendix
SWOT Table
Strengths
Weakness
· Good relationships with supply companies
· Lack if food options and variety
· Roasting own beans for quality
· High fixed cost
· Have highly visible store locations
· Reaching US market saturation
· Constantly innovating menu
· High price point
· Iconic Ubiquitous Brand
· Schultz needed for vision
· Superior customer service
· Lack of advertising and customer knowledge
· Look and feel of stores
· High employee loyalty and performance
· Good public perception
· Owning other brands
· Achieved economies of scale
· High Customer Loyalty
Opportunities
Threats
· Increasing of advertising and customer knowledge
· Downturn in the economy
· Diversification of food/beverage selection
· International brands entering US market
· Licensing to foreign markets
· Competition for buying quality beans
· Utilizing its wide range of café formats
· Small local specialty coffee shops
· Buying La Boulange in 2012
· Dunkin Donuts and McDonalds are cheaper
· K-Cups
· Low customer switching cost
· Emerging Markets (Brazil, India, Vietnam)
· High rivalry within the industry
· Involvement in health/wellness.
· Low barriers to entry
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Porters Five Forces
Medium
Risk of Entry
While the premium coffee industry is relatively easy to enter at on a small scale, it is
hard to grow and compete on the level Starbucks has achieved. Starbucks has
economies of scale, high brand loyalty and absolute cost advantage. However,
customers experience no switching cost and can easily substitute. For these reasons risk
of entry is medium because entering the market is possible but has challenges.
High
Intensity of Rivalry
The premium coffee industry: Few large players, many small local shops. Local markets
create a local fragmented industry. National Market dominated is dominated by a few
key players. High demand in the industry. High fixed cost: quality brans and labor. Little
exit barriers (selling location and equipment).
High
Power of Buyers
Buyers purchase large percent if not all of output. Buyers can go to multiple suppliers for
similar product (some beans are only produced in certain areas). If a buyer wants to
purchase a very specific type of bean that is no is not widely grown power decreases. It
would be hard for buyers to enter the coffee bean growing industry.
Low
Power of Suppliers
Suppliers mostly depended on few buyers. Switching cost for buyer is generally low.
Supplier power can increased when they sell a differentiated bean that is known for its
features and can only be produced in their region. This would make switching cost
higher.
High
Threat of Substitute
Coffee is a commodity product that can be easily substituted. Customers may or may not
have brand loyalty but either way in a pinch they will resort to what is easily available.
Questions
1) How would you characterize the specialty coffee café industry?
 Growing
 Specialized
 International
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 Independent Shops
 Expensive
2) What are the key success factors in this industry?
 Specialization
 Quality
 Company perception
3) What are Starbucks' strengths and weaknesses? Does it have any sources of sustainable competitive
advantage?
Strengths

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
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Good relationships with supply companies
Roasting own beans for quality
Achieved economies of scale
Have highly visible store locations
Look and feel of stores
Constantly innovating menu
Superior customer service
High Customer Loyalty
Good public perception
High employee loyalty and performance
Owning other brands
Weaknesses
 Lack if food options and variety
 High fixed cost
 Reaching US market saturation
 High price point
 Schultz needed for vision
 Lack of advertising and customer knowledge
Sustainable Competitive Advantage
 Economies of Scale
 Iconic Ubiquitous Brand
4) Porter argues that to achieve a sustainable position, a company has to make trade-offs that its competitors
are unable or unwilling to make. What trade-offs has Starbucks made?
 Customer experience for speed of product delivery.
 Quality products and service for low competitive prices.
 Visible café locations for heavy marketing.
5) What different activity choices has it made from its rivals?
 Roasting beans
 Specialization of drinks
 High customer service
 Offering employee benefits
6) How is Starbucks' product positioned in the market?
 Quality
 Specialized
 Customer Service
 Well known
7) How do its functional-level strategies align (or fail to align) with this positioning?
 Mass Customization (yes, aligned with positioning)
o Large drink verity combinations and options (specialized)
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
o Use of quality products (Quality)
Total Quality Management (yes, aligned with positioning)
o Lots of employee training (Customer Service)
o Consistent service and products (Quality)
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