Final Case Project – Starbucks
MGMT 4842 Strategic Management – Summer 2012
Michael Hamilton
6/15/12
Table of Contents
I.
Background Information……………………………………….p. 1
II.
Discussion of Strategy…………………………………………..p. 2
III.
Five Forces Model…………………………………………………p. 2
IV.
Driving Forces……………………………………………………….p. 3
V.
Key Success Factors………………………………………………p. 5
VI.
SWOT Analysis……………………………………………………..p. 6
VII.
Analysis of Financials……………………………………………p. 7
VIII.
Managerial Worry List………………………………………….p. 8
IX.
Recommendations……………………………………………….p. 9
I.
Background Information
Starbucks a specialty roast coffee store was first opened in a touristy destination in Seattle,
Washington called Pikes Place Market. It was founded in 1971 by Jerry Baldwin, Zev Siegel, and
Gordon. The three created the now multi-million dollar chain with an initial investment of
$1,350 each, and a bank loan of $5,000. Unlike today, the store initially did not sell individual
cups of coffee but only a variety of fine beans that were sometimes paired with coffee tastings.
The store was quickly successful and by the early 1980’s they a total of four stores which were
all profitable since there doors opened. It was around this time that Jerry Baldwin took over
operations and the other two, while remaining partners, went their separate ways.
After proposing the idea to take Starbucks across the United States and Canada and
being rejected, Howard Shultz was instead hired as head of marketing and overseeing the four
retail locations. Shultz had a multitude of ideas for the company, and despite some resistance
from its creators he was eventually able to pursue his visions and in 1984 when Starbucks
opened their sixth store they began to sell beverages. Within the first day they had served
about 150 more customers than the average of the other stores that did not sell beverages.
Although the Shultz’s ideas were working and improving sales, the company’s founders still did
not want to leave their original business model; insisting that “We’re coffee roasters. I don’t
want to be in the restaurant business.” Disgruntled with their decision Shultz decided to leave
the company to start his own coffee bar. He started the Schultz II Giornale Venture, which Jerry
Baldwin of Starbucks was the first investor. This Venture struggled some at first but in 1987
they purchased Starbucks for 3.8 million. Once in control of the company the expansion plans
began and Starbucks opened a total of 161 stores which was more than the goal of 125 stores.
Since then the growth was so exponential new leadership with more experience was brought
in. Franchising was initially avoided to keep control of the company but this cost much more for
the company. They raised money from various venture capitalists and by 1990 the company
was profitable and has been each year since (excluding 2000 due to a 58.8 million dollar
investment and in 2008 when the economy took a down turn). The company continued to grow
and began to license retail stores and expand internationally. By the end of March 2010 there
were more than 16,664 stores worldwide and that number has continued to increase.
II.
Discussion of Strategy
In the beginning Starbucks had a focused differentiation strategy and served a small
niche in the market place. Originally the vision was to solely sell high end quality roast coffee
beans. Starbucks is a first mover and a prospector and as they progressed and expanded they
grew from their specialized niche into a competitor in the global market place. It was the
company’s rapid growth and expansion that positioned them with the ability to leverage their
popularity. In the early 1990’s they initiated in a store expansion strategy where cover major
cities across the United States and ones the major cities were covered, stores would naturally
fill in the surrounding areas and cover the entire region. The philosophy was a “Starbucks
everywhere” which was a strategy that could cut down on delivery and management costs
while overtaking a large market share in that area. The original vision is still there and Starbucks
is looking to provide the highest quality coffees only now into a wider variety of distribution
channels and expand. They were building a company with “soul”. In order for this differentiated
growth strategy to succeed Starbucks wanted its products in restaurants, airlines, hotels,
universities, hospitals, business offices, and a variety of retailers. Through their success and
brand recognition they were able to come to agreements with many well-known companies
such as: United Airlines, Wells Fargo, Hyatt, Hilton, Sheraton, Marriott, Dryer’s and PepsiCo.
Through these Starbucks extended out through a large distribution chain. This brought them
the coverage they wanted along with presenting the opportunity for some product innovation
and diversification. The once seller of only coffee beans now sold and produced a variety of
products among their coffee drinks they also added ice creams, whole bean coffees go grocery
stores, coffee liquors, coffee accessories, baked goods, and even music CDs. By mass
distributing and licensing they were able to gain global presence and branding that was linear
with their differentiated growth strategy.
III.
Five Forces Model
Starbucks holds a huge market share and is the largest coffee chain in the world;
however, they like any company still face challenges and competition. Through Porter’s five
forces model we can examine how Starbucks deals with the threat of new entrants, industry
rivals, product substitutes, bargaining power of suppliers and buyers.
1. Threat of New Entrants:
While the largest coffee chain in the world they still face the threat of new entrants. This
is especially true due to being in the food and beverage industry which constantly has new
products or variations on previous items. This market is a fast paced one where things are
constantly changing. Although the due to the size and costs of entering the massive market that
Starbucks is a part of entrants are somewhat limited. They face more of a threat from already
established companies creating substitute products or under cutting their prices.
2. Rivalry Within The Industry:
I would say that their main rivalries in the industry are companies such as larger Coca
Cola, McDonalds and Dunkin Donuts. They are competing with Coca-Cola because of the joint
venture with PepsiCo which created Frappuccino’s. McDonalds now has McCafé in addition to
their large drink selection which is offered at lower prices than Starbucks. Dunkin Doughnuts is
the closest to their actual industry in the mass distribution of coffee but they hold only a small
fraction of the market share which Starbucks holds. The specialization and differentiation of
Starbucks’ products along with their enormous market share somewhat limits their industry
rivals.
3. Threat of Substitute Products:
Despite the company’s constant innovation they are always going to face the threat of
product substitution. In order to determine whether something can be substituted it is essential
to understand what about the product satisfies customer’s needs. A recent example of a
substitute which would have threatened their espresso double shot would be the smaller
longer lasting energy drinks like five hour energy. These products are not by any means coffee,
but they give a similar stimulating effect that can make them a substitute. Starbucks has a
strong image and brand awareness which gives them a distinct advantage; however with
somewhat high costs and many comparable products in the market place they will be facing the
threat of product substitution.
4. Bargaining Power of Suppliers:
Although Starbucks is one of the worlds’ largest purchasers of coffee beans the suppliers
still has some leverage. With the fluctuations in the price of coffee beans larger purchases are
often stated in futures contracts. Due to the large purchasing power of Starbucks suppliers can
leverage themselves by providing either highly specialized or quality beans, or providing a low
price, or some combination of the two. Another thing that gives the suppliers power would be
the demand that the company has for coffee beans, If they do not have any coffee beans they
will be unable to operate so if unavailable or in limited quantities the company still has to
purchase the beans and then just make adjustments on their sales end to ensure that they still
make a profit.
5. Bargaining Power of Buyers:
Since the typically a buyer of Starbucks coffee will purchase only a small quantity and
due to the company’s vertical integration the individual buyer holds little leverage, however,
they also have some buyers which are licensed to sell their products. These buyers have more
leverage due to the size and cash flow stream that they provide to the company. One example
that leverages the bargaining power of buyers is the “Preferred Office Coffee Provider” a
strategy where companies buy machines and coffee to make in their offices. This along with
external retailers like grocery stores of hotels which have a large purchasing power increases
the buyers bargaining power.
IV.
Driving Forces
There are many forces that create changes in Starbucks’ industry; some among them
would be their quality/product innovation, ambiance and marketing efforts, long term growth
rate, and increased globalization. Starbucks desire for high quality products is a force which
drives them to create new items that fit into their “laid back” culture. Due to the persona that
they are creating their products are often innovative and give the company its unique
differentiation qualities. They are always adding new products or variations to their food
selection or the accessories such as coffee mugs and CD’s; they are also entering new markets.
These efforts paired with their marketing efforts, including product placements, new products,
and the company’s expansions are a major part of the company’s strategic moves. Since
Shultz’s take over another major goal has been growth and expansion which ties into their
rapidly increasing global presence. Starbucks’ snowballing popularity among patrons has made
it possible for Starbucks to exceed initial growth goals, and begin to license stores as well as
expand internationally. These driving forces have allowed Starbucks as of September 2009 to be
operating in 50 different countries and have the high expectations to open 200 more in the
succeeding year. Over all these driving forces have given Starbucks increased demand, control
of a larger market share, and increased profits.
V.
Key Success Factors
Since opening Starbucks stores have been a tremendous success. Their differentiation
and rapid growth strategy have made them a leader in their industry. Among the many factors
that made this company successful are their abilities in product innovation/first mover, the
company’s culture, as well as their expansion strategy and vertical integration. Starbucks has
always been an innovator and doing things differently than the rest of the market. This was true
from their start when they didn’t even sell cups of coffee and only the beans. They have been
ahead of the curve in their industry with not only high quality at affordable prices, but the
extension of their product lines into such household favorites as the Frappuccino, or their ice
creams. These products have been successful in building a global brand recognition and
immense popularity. Starbucks ability to create these items and move them to the market
before competitors has given them a huge advantage over their competitors. While having this
advantage the company has taken some time to focus in on the customer experience and
employee morale improving the company’s culture. Upper management felt that Starbucks’
success depended upon the experience. Due to this idea, Starbucks has placed large amounts of
effort and resources into creating the “laid back” ambiance with in the stores to ensure that
patrons would get the full “coffee lover” experience. Another major aspect of this is how
Starbucks compensates and provides for their employees. In order to have happy workers
which would create their desired atmosphere Starbucks pays competitively for part and full
time employees. They provide benefits and health care, stock options, training, and a great
work environment that helps them secure higher quality employees. In addition to these
factors Starbucks’ core competence would be their expansion strategy and vertical integration.
Their partnerships and ventures with other large companies rapidly promoted new products
and spread the company’s name and popularity. This once a small local operation is now a
major global competitor. Vertical integration has allowed Starbucks to lower costs internally
from distribution to their proprietary roasting process. It has also given them better control and
the capability to produce more uniform standards for stores and their products. These key
success factors are major contributor to Starbucks’ success and large profits year after year.
VI.
SWOT Analysis
SWOT analysis is an effective way for the management of a company to determine their
strengths, weaknesses, opportunities, and threats. This can be used to determine what areas
need more focus, which areas should be considered for outsourcing, and which areas the
company is excelling. Below is a SWOT analysis for Starbucks:
Strengths: Large market share and purchasing power allow Starbucks to leverage purchases
and simply out compete competitors. Their vertical integration allows them to maintain control
of operations and produce to their high quality standards. The differentiation among their
product line gives them an advantage by limiting risk by spreading out further over the market
place. Along with these the company’s marketing is still contributing to their ever growing
brand recognition and loyalty. The company’s culture also provides good employment
opportunities which ensure employee happiness which safeguards the customer’s experience.
Weaknesses: Some weaknesses are the international markets; the company depends heavily
upon the United States. There could be some ways to improve/increase foreign stores
performance. There have also been some recalls due to quality control issues. While the
company focuses on quality they may need to better oversee the roasting and packaging
process.
Opportunities: Starbucks now has the opportunity to focus on and improve their store
experience as well as tweak other factors to increase efficiency. The can continue to expand
and look to new market entrances or joint ventures/acquisition that would strengthen their
market presence and increase overall profits.
Threats: Competition among other retailers and food distributors that limit and/or make high
quality coffee beans scarce. Also the fluctuation in price of beans can make an immense
difference in Starbucks profit margins. There is also the threat of product substitution with
other beverages and energy drinks.
In this situation the weaknesses and threats are outweighed by the strengths and
opportunities. Starbucks has been able to gain and maintain an immense market share. Their
ability to remain vertically integrated has helped them to maintain control of their retail stores,
distribution channels and their rapid expansion. However, with the vast resources available and
potentially untapped opportunities there are still current and future improvements and growth
for the company.
VII.
Analysis of Financials
Starbucks is a successful company with relatively sound financials. Since 1990 the company
has turned a profit each year since, only excluding 2000 due to a 58.8 million dollar investment
and in 2008 when the economy took a down turn. However at this time a lot of other
companies also suffered from the recession. The year following the economic downturn, 2009
improved but the company still had some improvements to return to the same pre-recession
profitability levels.
Revenue
COGS
Operating expense
Profit after tax
Total assets
Gross profit margin
Operating profit
margin
Starbucks Financial 2005-2009
2005
2006
2007
6369.3
7786.9
9411.5
2065.2
3178.8
3999.1
5665.4
6986.9
8465.6
494.4
564.3
672.6
3513.7
4428.9
5343.9
2008
10383
4645.3
9992.7
315.5
5672.6
2009
9774.6
4324.9
9334.5
390.8
5676.8
67.58%
59.18%
57.51% 55.26% 55.75%
11.05%
10.27%
10.05%
3.76%
4.50%
Net profit margin
14.07%
12.74%
12.59%
5.56%
6.88%
Despite external factors the company has been able to turn a profit and operate on a
large international scale. However, as the chart above shows their margins have been
decreasing across the board. They improved from 2008-2009, but they are lower than in 2005.
Some of the cause for the margin decreases could be increased costs due to the rapid
expansion, increased costs of supplies like coffee beans, or they are not increasing prices
though their expenses grow so their margins are shrinking. Starbucks Still has a strong financial
foundation and substantial amount of capital to keep operations going. The company needs to
examine their operations and determine why profit margins are shrinking. End result is that the
company is producing profits year after year.
VIII. Managerial Worry List
With decreasing margins Starbucks has several issues that management should be
concerned with and address. An important factor would be to determine exactly why the
margins are shrinking; a major possibility would be the increasing costs of operations. With
declining sales and increasing costs it is important for management to be worried about
strategy to somehow correct these problems and continue ahead with a positive motion. Some
key managerial issues and questions to be asked should be:

Are we meeting our goals and expectations?

What are we not doing efficiently? Could we outsource at lower costs?

What is causing profit margins to decrease?

Why is our international market not as strong as our US market?

How are we placed among our competitors in our industry?

What draws customers to our stores and what keeps them coming back?

Are there any new markets or opportunities we should partake in?

How can we improve internally to ensure that there are no quality control issues?

How can we improve our international stores performance?

How can we improve profit margins across the board?

How can we improve the customer experience?

How can we draw in new customers?

Where do we want to be at the end of this year, 5 years, and 10 years out?

What direction are we headed in, and is it where we want to be?
These are a few of the questions that can help to identify flaws and areas that need
improvements. Management can use these tools to determine the company’s state, whether
they are still in a growth state or if they have planned off. Understanding current position is
critical to Starbucks being able to achieve goals and plan for the future.
XI.
Recommendations
For Starbucks to continue growing steadily and increase their financial performance there
are some things that should remain the same, as well as some changes and improvements that
should be made. Some recommendations would be to continue growth, expansion and product
innovation efforts. Place better restrictions/observations on operations, and to make
adjustments in their leveraging or production to improve profit margins.
The recommendation for continuing growth and expansion as well as product innovation is
merely due to the Starbucks huge success in the past. Growth, expansion, and product
innovation are among the core competencies of the company, and there is no reason for them
to quit doing them while they are ahead. The company’s growth model has been very
successful; however, I feel that they need to pay more attention to the overhead costs. This is
even more important due to the financials appearing as though the company is over extending
themselves, and not succeeding as they would like to, especially in foreign markets. This is the
reason for implanting better restrictions on operations. Their rapid expansion, while a positive,
can draw focus away from differentiation among the cultures, regions and demographics where
they operate. If the company were to focus more locally I think that there regional sales would
improve due to customer satisfaction. Starbucks needs to keep focus on quality, appearance,
and customer satisfaction. It doesn’t do much good having thousands of stores if no one wants
to go to them. So I feel that they need to pay a little more attention to the day to day
operations as opposed to just rapidly expanding. After all initially the wanted to create a unique
experience and supply high quality service as well as products. The final recommendation to
adjust activities to improve profit margins relates to the other two points just made. The
company needs to continue to expand while putting better controls and focus on individual
operations as well as regions. Along with just focusing on operations and localization, they need
to leverage themselves better among their suppliers in order in decrease cost of goods sold.
Another suggestion would be to become more vertically integrated and acquire a coffee bean
farm; much like what McDonald’s has done they would then have better quality control and
could control the costs of production. I feel that Starbucks could be a stronger company if they
were to continue to grow while better leveraging themselves and decreased production costs.
They should focus efforts more geographically to improve their foreign operations as well as
customer experience. Following these recommendations could benefit the company by
increase sales, operation size, customer satisfaction and ultimately increasing profits.