STARBUCKS CASE STUDY
University of Greenwich
NAME: SAAD SALAHUDDIN
STUDENT ID NO: 0006930689
COURSE: BA (HONS) BUSINESS STUDIES
SUBMISSION DATE: 30/03/12
The Starbucks Corporation was born in Seattle in the early 70s and has blossomed into the largest selling specialty coffee retailer in the world. It has stores in many countries worldwide, including many domestically, and has competitors in two markets. The first being the Tea and Coffee Manufacturers (Non-Alcoholic Beverages) industry and the second is restaurants. Starbucks is the largest company in the world, with 17,133 stores in 49 countries, including 11,068 in the United States, nearly 1,000 in Canada and more than 800 in Japan.
The outcome of the report will come after an in-depth analysis of Starbucks external environment has been done, where the pestle analysis and porter`s five forces will be discussed to identify the current opportunities and threats that exist in each of the industries. With the use of several conceptual tools, such as the VRIO, Value Chain framework, SWOT, and BCG Matrix Starbucks internal capabilities will then be examined to discover how well it is performing. The current issues and challenges faced by Starbucks to remain competitive in each sector will then be discussed by doing each of the calculations of the financial ratios to see how well they are performing in their business.
After completion of the external and internal analysis it will be possible to draw up several strategic options open to Starbucks. Using the TOWS, ANS OFF, and BCG MATRIX evaluation tool developed by Johnson et al each of the strategic options will be ranked on their suitability, acceptability and feasibility. After evaluating each option the most appropriate will then be chosen and discussed in finer detail by using Bowman`s Strategy Clock, and then finally, a conclusion will provide a logical summary to the report and provide information on whether the recommend strategy is sustainable.
Part 1: External Analysis:
If Starbucks charges high tax to the consumer then lot of consumers won`t come to Starbucks as they will have to pay more, so Starbucks will lose customers which will decrease their sales which in other words occur a loss in their industry.
A change in government policies affects the industry as they may bring in new laws or new or existing government who might involve taxes. When mentioning new ventures the political turn oil or civil war should be taken great care.
International trade regulations/tariffs:
Tariffs and International Trade regulations has contributed to some of the environmental factors for Starbucks; due to high tariffs the company would be compromised, the ability to source quality coffee beans would affect Starbucks reputation, global sales, and competitiveness as less people will come to Starbucks and they will be able to get limited amount of coffee beans as they would pay less. Economical Influences pertains to the exchange rate, Starbucks import coffee, sugar, and milk; with a weaker currency the cost will eventually increase.
Where there are earthquakes, tsunamis, and wars Starbucks they purchase their coffee beans from those countries. This can affect Starbucks as the countries won`t be able to provide coffee beans and they will have no coffee to sell.
The Americans with Disabilities Act is pretty self-explanatory: it protects against discrimination of people with disabilities and ensures that "reasonable" accommodations are made for those with disabilities. Starbucks is affected by this law just as much as any other company. During the hiring process a potential employee cannot be turned down because he is, say, deaf. He has to be given the same opportunity to work as any other prospective employee with the same qualifications. It is the responsibility of Starbucks to work with the deaf individual to see how/what he can contribute to the company. It is also their responsibility to see what assistance they can offer the individual to ensure that he can be successfully integrated into the network of Starbucks employees.
Before the Family and Medical Leave Act were passed in 1996, women who became pregnant while employed had a lot to worry about. They had to work very hard to get time off of work after their child was born. They had to make some very hard decisions and received little legal support. To even further complicate the situation, their positions were not always guaranteed to be available when they returned to work. Their bosses might hire someone else while they are away taking care of their new-borns!! So the passage of this law is huge for expectant mothers but it also helps out people whose family members become seriously ill. If your mom or husband is on their deathbed the last thing you want to worry about is your work.
After the Asian Crisis, consumers in Macau spend even more carefully. Starbucks needs to provide coffee of higher quality with more reasonable price. Starbucks is targeting the people with white collars as they are the ones who will spend the most as there income is more. Majority of the Starbucks customers can be classified into this group. Although Starbucks attract some white-collar workers and tourists, Macau people spending on food and drink has declined starting from the past several years. Starbucks needs to pay attention on this change and make suitable adjustment so as not to affect the sales of its coffee.
As the inflation rate increases of Starbucks the disposable income of the people drops, so the inflation affects Starbucks as limited number of people will obviously come to Starbucks and pay less, which, might affect Starbucks business as their sales may decline.
Competitors can compete with Starbucks which could decrease the profits and profit margins as they try to increase or at least retain their share, as Starbucks competitors may sell their items at a lower rate than Starbucks, so majority of the people will definitely go to other coffee shop as they are selling at a cheaper price and Starbucks will slowly start to lose their customers which will occur a loss.
The farmers of the coffee bean income are now less than their income which they had before the globalisation occurred. This might affect as very few people may want to work, which on the other hand means that less number of coffees will be produced, which will affect the supply of Starbucks and the possible profits.
The exchange rates affect Starbucks when dealing with the international trade, as if the rate of the currency falls in the coffee supplier’s country, then this will assists Starbucks to get more money which is when they will import the goods to their country. However, if the rate of the currency rises in the coffee supplier’s country this will assist Starbucks to achieve less money which is when importing the goods to their country. So, both the ways the exchange rates are being affected.
This is a preview of the whole essay
Income is an important factor for Starbucks as it determines where they are going to promote or detect their stores. Starbucks should target those people who have high income and also are willing to pay more as coffee is more of a indulge product.
Attitude to work:
Starbucks would not consider opening their store where people have a humble attitude to work. Recruiting people would be difficult, it would be hard to train people, and the income of the staff would be very massive. In large cities large numbers of people have their lunch outside rather than going to a canteen. Starbucks can gain money from this as they can built up their shop as a place where people can talk with each other, this will mean that they will slowly increase the number of people in their stores during that period of day.
Standard of education/skills:
Standard of education and skills should be given more importance when it comes to building new locations, because if the standards of education and skills is low of the employees, then Starbucks will have to train them a lot as they won`t have any idea how to run the cash register efficiently, how to speak to the customers, and serve properly the customers so this may lead to Starbucks losing more customers and falling into a loss, however if both the education and skills are high of the employees, then Starbucks will have to train them less as they already have lot of knowledge on how to run the cash register efficiently, how to speak fluently to the customers, and serve the customers properly which will gain Starbucks to make profit.
People with higher income:
Those people with the most disposable income, e.g. young single professionals etc., will be familiarized to high standards. Starbucks must be sure that its shops are fresh and comfortable, service is of the main demand and health and safety issues are fully addressed.
For staff and customers transport is vital as where there is an easy access the staff and the customers won`t be able to provide a reason for staff to come late and for customers to have a look at the stores.
It could be seen that majority of the people are getting older and the rates of the birth are falling down. Currently, Starbucks is focusing on selling their items to younger generation; however their opinions might change in long term as the proportion of the market for young people reduces. The most effective way might be to expand the target market although there might be danger of separating the existing customers.
The development that is happening in western societies is crucial as this is where people want good healthy food as it is related with healthy living in the current market. Starbucks can use this facts when they are thinking of selling extra products, also coffee, as huge number of their customers want healthy substitutes of cakes and biscuits, which have been related with the coffee in the past.
Starbucks is offering free and unlimited Wi-Fi that is why their policy has changed as they are providing people to use two hours of the Wi-Fi to the cardholders of Starbucks. However, now people can take advantage of using the unlimited Wi-Fi any time when they want and as long as they want.
New materials and processes:
With the improvement of the technology in making the coffee machines and computers which Starbucks use to run the cash registers will help the staff to work more rapidly and capably. This will help to assists customers even rapidly and assist more customers in a day. This will stop the customers not having to wait for ages as a result benefiting the relations amongst the customers and growing the base of the customers.
To keep ahead of the competition Starbucks must find effective software promotions. This relates to refining the websites they have and also developing the rapidness and the excellence of the service which are delivered on the shop floor.
Rate of technological change:
In today`s world market the speed of the change in technology is higher than it was before thirty years ago. Most of them have got to do with the internet and the rapidness from where around the world the information could be interconnected. To remain ahead of their competitors, Starbucks need to spend heavily only to be immobile in increasing and improving market.
- Employment law – Individual countries have different employment laws. Some countries may have restriction on how many hours should each of the employees work each week and every employees will be paid different salaries. When transferring to another place, Starbucks should take all this as an important issue.
- Health and Safety regulations- Starbucks may find that in some countries Health and Safety regulations are not followed. It would a good idea to apply the health and safety regulations in all of the shops to maintain a good universal image. Even if they do not keep the high standards they will have to pay large amount of money as they have to ensure legally that their customers and staff are safe while they are inside the stores.
- Monopolies Commission- To control a larger proportion of the market, Starbucks would consider growing their operations further which they already have they will have to study the fact of breaching the monopolies law as they might have a larger share market. This would be biased as they can take over the other companies very easily. So, it indicates that they could enjoy the economies of scale and control the prices which were not competitive and escape because of the non-existence of the competition.
- Land Use- As some of the areas of land maybe endangered, so that is why Starbucks may have to follow by the rules of the local planning when constructing shops or modifying the purchased locations. The local government would speak related with all of these problems.
- Pollution problem- The customers of Starbucks provides lot of wastes as they get out of the shop with the coffee in their hand and later on places on the street. As other resources could cause damage to the environment, so that is why the packaging should be done naturally.
- Work disposal- As there are severe laws in majority of the countries to confirm the firm trading in their country which arranges the waste which are generated in their business in a exact and effective way. If these laws are not followed by Starbucks then they may find themselves being certified, this will not only affect them economically but also creates a dull impression on the brand name.
- Environmental pressure groups – Starbucks should be careful of the physical and influential power of the members which includes Greenpeace and Friends of the Earth. Any destruction to the animal or environmental rights from a company is basically rapidly followed.
PORTER FIVE FORCES:
- The Threat of Substitution:
As there are lot of caffeinated beverages accessible in the market, so that is why the threat of the substitute is high.
- The Threat of New Entry:
As there are necessities for the capital, so that is why the threat of the new entry is high, as it is not expensive to open up a coffee shop. Compared to brand identities the threat is low, as they have been achieving their ones successfully.
- Competitive Rivalry:
As the industry rises, competition is gradually growing in contrast to Starbucks. Competitors seek an advantage that is by reducing the price, bringing in a competitor’s product, extent the product to raise the share of the market or attach the alterations which the other competitors need to accept to save it.
- The Bargaining Power of Suppliers:
As Starbucks is a well- known company that is why any suppliers will supply goods to them, so that is why coffee beans suppliers have low bargaining power as they know that Starbucks can go to any suppliers to get those goods which they want. So, Starbucks could get supplies of paper and plastic products, like cups, napkins, lids, etc. having very less power to bargain because they have large amount of substitute from where they could pull from.
- The Bargaining Power of Buyers:
When premium coffee came like Starbucks, the buyers did not have much of the power to bargain, this happened because of the sheer scale which causes the decrease of the power to bargain to any members of the groups of buyers.
By new entrants coming in and competitors like Mc Donalds who entitles to give the finest roast coffee of sensible class for lower price, buyers now can influence to bargain more compared to the bargaining power they had before.
PART 2: Internal Analysis:
The value chain analysis of Starbucks is:
To build relationship with the farmers and wholesalers, Starbucks agent went to countries where they are growing coffees. To get the green coffee beans, it had to be dealt with the farmers. It obtained high price as to make sure that the poor people have sufficient money to protect the cost of the production and also for their families. Starbucks maintained fixed price to obtaining the prices of the coffee beans in the coming time.
As they were very well known company with reputation that is why they were able to increase their market through distribution channels. To overlook the problems, Starbucks searched for partners who had solid restaurant experience, strong financial resources, had values and a culture where they trade with Starbucks were they were loyal with customers.
Marketing and Sales:
Through marketing consumers knows the Starbucks coffee and buys it. Marketing will not be required as Starbucks is known in the entire world as majority of the people knows the name and the image of the brand with great value of the products.
This is very important part for Starbucks as this retains the value of the product i.e. fixing, renovating, and preparing. This area needs to be taken into consideration with the members of staff as they treat with customers, it emphasises on the need to confirm the experience of the customers that they had pleasure enjoying the atmosphere and the excellence of the product.
Procurement of Starbucks is the process of gaining the first class coffee beans from suppliers, so that they can use it in their coffees.
Technology and Development:
They have a technology where customers can order the coffee online and then come to the store to get the coffee. Even some of the stores have computers where people can use it, and also customers can later on come to the stores to get it.
Human Resource Management:
It is difficult where there are facilities of recruiting, managing, training, developing and rewarding people. This is where they have indicated that employees were treated similarly; same for the people who work under the lower level who worked 20 hours per week will be given bonuses e.g. free coffees and health care coverage. Another effected structure is to give 24 hour training to the staff beforehand they were accepted to work openly with the customers.
The Firm’s infrastructure; which is about the ways in which Starbucks want their organisation to run and how it is best to appliance systems of planning, finance, quality control and information management.
This is related with gathering, packaging and supplying coffee. A customer is getting a mug of coffee from the shop.
1. Starbucks is the famous retailer for coffee in the universe and also it is known for its brand.
2. With slogan of `The Starbucks Experience` it has got the solid trademark of the appearance of the brand.
3. It has got more than 16,000 retails in 48 countries throughout the universe.
4. It is one of the toughest franchises in the universe with more than 6500 warrants.
5. Starbucks gives larger products and services that is why they are well known for both of these categories.
6. Starbucks presented both efficient and sensitive aids.
7. To work for Starbucks it is ranked 7th on the magazine of fortunes.
8. To have dependable recent customers entirely everywhere wherever Starbucks have their stores.
1. All type of market cannot purchase Starbucks products.
2. They emphasis too much on the American market.
3. Starbucks cannot promise that milk, beverages, chocolate, ice cream, and baked goods are free from biologically ingredients.
1. As the employees are well educated that is why it is simple to train them.
2. They can convert their appearance of coffee from adversely affect to affirmative affect.
3. They could differ to other products not simply in coffee.
4. When Starbucks are obtaining great supreme beans in Indonesia this supports the farmers to take care of their families and spend in a viable production.
1. As the income of Indonesia is little that is why it makes it difficult for them to entre more subdivision of the market.
2. The society may have an emotional feeling which may cause a bad effect.
3. The domination is leading the small cafes to get out of business.
4. Starbucks pays less amount of money to their staff with an average skill of work which needs to be completed.
VRIO OF STARBUCKS:
Human Resource Management:
Starbucks has formed a relationship with the employees and with its company. The work is cured with self-respect, providing welfares to the employees, and providing help to the employees. To ensure that the customers are assisted properly the Store Manager wants to become second worldwide. Employees are given the advantage to run the business themselves in relation to business.
Starbucks has spent lot of money in advertising which includes billboards, and online advertising. They advertised using old fashioned way as a replacement of earning more money. In New York they are giving free taxi rides and also free subways. If somebody can make a sensitive connection then, lot people could be attracted to their stores.
Sales or Retail Locations:
Service is the unique factors which separates Starbucks from the competitors. As they have 85% of the sales, business incomes come from the retailers. The headquarters are there to run the retail locations and assist the plane running business. There may be other companies who hire the similar type of people who wants to keep a strong bond with the customers. This makes sales strategy main table competitive advantage.
Besides this, Starbucks income statements reveals that the revenues was high in 2003 compared to 2004 and more in year 2005 compared to year 2004. Overall, the growth rose from year 2004 to 2005. This lead to Starbucks to STAR which means they fall into long term opportunities for the development and profitability. The divisions go in every direction starting from forward, backward, and horizontal integration, market penetration, and market development and product development will be carefully reflected.
Part 3: CURRENT ISSUES AND CHALLENGES DIAGNOSIS:
It could be concluded by looking at the theories used in Part 1& Part 2 of the assignment that Starbucks are really doing well in their business and making lot of profits, however it could be seen that the internal and the external analysis had already affected in the terrible years in financial years between 2007-2009.
Current Assets have increased year by year because the inflation rate went up and the cost of the item will rise as Starbucks have to create new price lists. Current Liabilities have increased from Year 2006 to 2008 as the economic growth was low as Starbucks borrowed more money from the bank, but failed to pay the money within the time period. However, it decreased in 2009 as they managed to pay some of the money that they took loan in year 2009.
Gross Profit Margin
The gross profit increased year by year because selling price of goods sold without any corresponding increase in the cost of goods sold. The sales increased every year because Starbucks sold more items each year. The gross profit margin increased in 2006 because the company has a favourable pricing power firm raise price due to overwhelming demand. However, in Year 2007, 2008 & 2009 the gross profit margin had decreased because the price which was sold was with correspondent increased due to the change of the prices of the products. This also means that the company has no say in charging a price.
Total Asset Turnover
The sales increased from Year 2006 to 2008 because of their brand excellence which lot of people purchased from their stores as they were well known brand. However, the sales decreased in the Year 2009 as they charged too much on their items, so that is why limited number of people bought their items. The total assets increased in the following years which are in 2006 to 2008 because Starbucks had to pay more for their assets as they had bought more fixed assets like furniture, equipment, etc. However, in the year 2009 the total assets decreased because they had to pay less for their assets compared to year 2006-2008.
Part 4: GENERATION OF STARTEGIC OPTIONS:
In this report TOWS Matrix and Ansoff Matrix will be used. Ansoff’s matrix allows marketers to go to different ways where they can expand their business either by existing or new products or both. By analysing whereabouts Starbucks are at the current moment in time, we can suggest areas of improvement/consolidation.
- Starbucks are seen as increasing the price of the coffee and dairy products.
- They have got new products and services which could be sold in their cafeterias. Examples include products like coffee, sugar, tea, bananas, honey, cotton, wine, fresh fruit, chocolate, flowers and gold.
- When Starbucks are obtaining great supreme beans in Indonesia this supports the farmers to take care of their families and spend in a viable production.
- They could rebrand their products with other producers who sell foods and drinks, and well-known name for franchising of other items and services where it is possible for both to of this to do.
- As their R&D might be affected and start to work slowly then they may fail to improve their products and services.
- If the retail coffee is slow in providing the service, then they may lose their entire business as they are dependent on the main competitive advantage.
- The company has made more than $600 million profit in 2004. In the same year they had made an excess income of $5,000 million which means that they had this money in the same year. So, this means that they have earned more $5,000 revenue then they usually earned in 2004 which means in later years they can earn more revenues.
- It is a company which has been made for its well- known products and services. It has nearly 9,000 cafes included in 40 countries. So, most people will trust their products and want to buy products from their store.
- It was one of the wealthy companies amongst the top 100 companies to do job over there. As employers gives importance for doing the work at Starbucks that is why they give high priority to the employees. So, most people will want to work at Starbucks and this on the other hand will help Starbucks to do their work even less period of time as they will have more employees working for them.
Ansoff’s Matrix of Starbucks:
Starbucks had to Market existing products to existing customers. E.g. promoting the product, relocation the brand, making espresso, cappuccino, mild, smooth and bold coffee`s.
To give offers in the same store would be cheaper than opening up a new store. The new items will have Starbucks logo and this will help them to make more profit because of the objects that they sell. Starbucks are in growth stage, so should Starbucks should spend more time and money in fresh products in current markets where people are looking for ways to find about Starbucks.
If Starbucks offered new products in their stores that they have, then it will be cheaper compared to opening up a new market. This will help Starbucks to come up with new items like the Frappuccino blended coffee, Frappuccino light blended coffee, and Traditional Coffee’s with ice.
Compared to the above two options which are product development and market development this option is more of risky, however it is important that they take this into consideration when they are targeting long term goal. Starbucks will have to go to different types of consumers. This might involve Mugs, Tumblers, and Coffee Machines.
PART 5: EVALUATION OF STARTEGIC OPTIONS:
Starbucks has a low price strategy; they focus on low products and the market segment where the price is an important issue.
Route 2 is the low price strategy which gains lower price compared to the competitors when trying to match the same product/service.
Route 3 is the hybrid strategy which helps to gain the different products and price which are less than their competitors.
Route 4 is broad differentiation strategy where it sees where they can offer their products and services differently related with the competitors which are extensively valued by the buyers. The target is to gain something by offering better products or services at exact price or at greater price.
Route 5 is the focused differentiation strategy which looks for high prices for the product/service which aids to qualify premium price, basically for the market which has been carefully chosen.
PART 6: DESCRIPTION OF SELECTED STARTEGY:
Starbucks should implement strategic options; 4 and 5 as compared to SAF evaluation they scored really high. The possible consequences of affecting these strategies are summarised below;
- Achieve the need of the complicated realization factors for the coffee segment. This might be high.
- Recover the whole market share.
- Improve the behaviours of customers near Starbucks coffee.
- Keep hold of or progress the market share in their different types of coffees that they make in different segments. Potential high returns in future.
- In relations with the cost, company becomes updated. So, this can help to reduce the cost for the customers and raise the margins of the items.
- When converting the low cost to the customers, the competitors will have to decrease their restrictions and earn even less profit then they were earning.
In conclusion the net profits should rise in the near future.
Starbucks has the strategic capabilities to supervise use those capabilities or tools. It will need a large strength and will need a large number of economic powers. Moving the previous differentiation strategy a bit will make the company more updated which will permit to be flexible in the future as it had already is nonstop gaining advantages from the competitors even more vigorous and hard to copy.
PART 7: CONCLUSION:
Having analysed Starbucks internal and external environment and assessed several strategic options it is possible to suggest there are several ways Starbucks can continue its success despite the many threats and weaknesses that surround it. It is of fundamental importance that if Starbucks wants to remain competitive in all of its industries that it becomes more streamlined and lowers costs in order to meet consumer need for lower priced technology. If Starbucks can implement the strategic options recommended it is clear the company will be in a powerful position in all of its industries. This coupled with the unique resources and capabilities Starbucks has will further make its core competences and competitive advantages difficult to copy. Starbucks will have a sustainable competitive advantage over rivals. Starbucks has been increasing its debt every year, and at a pace that is faster than their assets are growing (which is clearly unhealthy). This is why we chose for the firm to slow down its expansion and to focus more on marketing their products. In such a saturated market as the one that they are in Starbucks needs to focus on increasing consumer awareness and to decrease debt as much as possible. In closing we believe that Starbucks can become even more profitable if they slow down their expansion and concentrate on the stores that they already have open.
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