In 1994, Starbucks did joint venture with PepsiCo to use their distribution channels because Starbucks had to increase distribution channels. In 1997 and afterwards Starbucks started Mail Order Sales through which they sold coffee making equipments, candies, and pastries etc. In the same time period Starbucks worked a lot on corporate social responsibilities by starting different schemes. In 2003, Starbucks competitors were Second Cup, Kraft General Foods, Proctor and Gamble, Nestle, and some small locals. In 2004, Starbucks’ offerings were Fine coffees, Exotic teas, Dark roasting coffees (Coffee beans), Italian style hot and cold espresso drinks, Hot and iced teas, Fresh pastries, Juices, Coffee making equipments, Coffee mugs and Music CDs.
Above, you have seen the evidence of Starbucks’ efforts for global dominance. So, we do not feel hesitant to predict that if Starbucks continue with such spirit, then there will be no point left as a mistake on their part and it will become the most respected and regarded brand of this world.
Questions
Q. NO. 1
What are the key elements of Starbucks strategy as of 2004? (What is the store concept, the customer offerings and differentiators? The expansion strategy? The financial strategy? The personnel management and social responsibilities? Conduct a five forces analysis?)
Q. No. 02
What was the original strategic vision and objectives and how did they evolve? What is your opinion of Starbucks’ mission statement? What grade would you give Howard Schultz for his job as the CEO Starbucks and why?
Q. No. 3
What is your assessment of Starbucks financial performance during years 1998-2003? (Growth rates, profitability, control of major cost categories, financing, ROE, and P/E ratio?)
Q. No. 04
What were the key issues faced by Starbucks in 2004?
Q. No. 05
What recommendations would you make to Howard Schultz to sustain the company growth and support strong financial performance in the years ahead?
Q. NO. 1
What are the key elements of Starbucks strategy as of 2004? (What is the store concept, the customer offerings and differentiators? The expansion strategy? The financial strategy? The personnel management and social responsibilities? Conduct a five forces analysis?)
Key Elements of Starbucks’ Strategy
After going through the case study we found that Starbucks did a lot to bring the innovation in strategy throughout its journey from 1971 to 2004. We will be discussing the strategies and its elements in our document. Below, we just have a glimpse of these:-
- The store concept
- Product line (Offerings)
- Competitive edge (Differentiators)
- Expansion
- Idea
- Geographical
- Product
- Distribution channels
- Financial management
- Human resource management (Personnel management)
- Meeting the social responsibility measures.
In upcoming text we are going to put light on these elements i.e. how Starbucks managed to move with the dynamic environment which is the basic need for any business to survive.
Store Concept
Starbucks started with the concept of retail coffee store but later on due to the entrepreneurial itch of Howard Schultz they entered into restaurant business which was the addition to their retail store concept. This restaurant’s idea came from Schultz’ trip to Milan, Italy where he visited espresso bars. The theme behind this idea was to provide special sitting areas where families and friends could sit together and enjoy chit chat holding a cup of coffee with Baristas performing around to cheer and entertain them. Moreover, they made a strategy to attract the professionals by adding a facility of Wi-Fi in their stores. In short, they created the ambiance of stores in a way that could make customers’ feel pleasant.
Product Line or Offerings
The offers are as follows:-
- Fine coffees
- Exotic teas
- Dark roasting coffees (Coffee beans)
- Italian style hot and cold espresso drinks
- Hot and iced teas
- Fresh pastries
- Juices
- Coffee making equipments
- Coffee mugs
- Music CDs.
Competitive Advantages or Differentiators
Their differentiating elements are as follows:-
- They were the pioneers to introduce espresso bar idea in USA
- Mail order sales
- Word of mouth marketing
- Employee motivation strategies to attain improved employee commitment
- Convenient distribution channels
- Introducing chemical free cultivation process.
Expansion
To expand the business they worked on three areas which are elaborated below:-
Idea
They expanded their business idea by moving towards the restaurant business from a retail coffee store.
Geographical
They started with expanding the business outside Northwest Pacific i.e. in Chicago, California, Los Angeles and Portland. For this particular aim, Starbucks made zonal “Hubs” in which they hired Vice Presidents to induce the culture of Starbucks in newly opened stores. After their success of this little geographical expansion, they began to enter into the international market and for this purpose they brought local license holders into the partnership to control business activities in their relative regions.
Product
Back in 1971, they started with Fine coffees, Exotic teas and Dark roasting coffees (Coffee beans). Later on they expanded the product line by adding Italian style hot and cold espresso drinks, Hot and iced teas, Fresh pastries, Juices, Coffee making equipments, Coffee mugs and Music CDs.
Distribution Channels
One of the expansion strategies was to do the joint venture with PepsiCo in 1994. The purpose of this venture was to use the distribution channels of PepsiCo which were convenient so that Starbucks’ distribution channels could also become convenient eventually.
Financial Management
Schultz asked for the “Centralized Information Systems” to have a check and balance on sales in thousands of stores around the world by keeping the back up of transactions. Another strategy which they adopted was to convert the form of business from partnership to Private Company which opened the doors for raising firm’s capital.
Human Resource Management or Personnel Management
Following are the efforts they did to achieve employee commitment:-
- Starting Health Care Program for permanent and part time employees as well
- Paid vacations
- Stock Purchase Plan (Employees could buy shares at discounted rates)
- Stock Option Plan (Shares were offered on 12-14 percent deduction of basic pay)
- 30 percent discounted products.
Meeting the Social Corporate Responsibility Measures
Starbucks did few efforts to meet its social corporate responsibility measures:-
- In 1991, they organized concerts to sponsor CARE (The world relief organization)
- In 1995, they provided financial assistance to Agricultural Improvement Projects
- In 1997, they provided technology to the coffee growers of Guatemala.
- In 2002, they started Green Store Task Program which was to reduce, reuse and recycle the wastes.
Five Forces Analysis
Q. No. 02
What was the original strategic vision and objectives and how did they evolve? What is your opinion of Starbucks’ mission statement? What grade would you give Howard Schultz for his job as the CEO Starbucks and why?
Strategic Vision
“To establish Starbucks as the most recognized and respected brand in the world.”
Strategic Objectives
- They wanted to have 15,000 stores by the year-end 2005.
- They aimed to provide a great work environment and treat each other with respect and dignity.
- They believed in taking on diversity as an essential component in the way they do business.
- To apply the highest standards of excellence to the purchasing.
- Roasting and fresh delivery of coffee.
- To develop enthusiastically satisfied customers all of the time.
- To contribute positively to their communities and environment, and recognize that profitability is essential to future success of business.
How did they evolve?
At the earlier stages they promised themselves that they will not leave even a single stone unturned to make Starbucks the most recognized and respected brand in the world. Therefore, they thought that this could only be possible if they will develop these strategic objectives because these are basis to earn the respect and fame for any business.
Mission Statement
“To inspire and nurture the human spirit— one person, one cup,
and one neighborhood at a time.”
Our Opinion
This mission statement along with strategic objectives provides a focus for employees as they make strategic decisions. It not only supports the employees, but supports the customers as well, making a note that they should be satisfied all of the time. The mission shows alignment with the vision by stating how the company plans to reach the broad goals set by the vision. Another supporting sentence of strategic objective aligned with the mission statement shows that the “company applies the highest standards of excellence to the purchasing, roasting and fresh delivery of its coffee” which supports the idea that Starbucks uses the best available resources to give it a recognized and respected name.
Grade A- to Howard Schultz
We deducted his marks a bit because he left the spaces in the area of marketing as he did not spend adequate budgets on advertising and product innovation. Last but not the least is that he did not attempt to study the environment properly while entering into new geographical areas e.g. he opened a store down street in Chicago which was not a good idea due to cold weather conditions. On the other hand, this higher grade to him is due to the reason that he did not leave the space for us to give too many recommendations.
Q. No. 3
What is your assessment of Starbucks financial performance during years 1998-2003? (Growth rates, profitability, control of major cost categories, financing, ROE, and P/E ratio?)
Control of Major Cost Categories
In this portion we have analyzed that how Starbucks controlled its fixed cost. If we talk about the locations, it was very expensive to purchase land and then develop it as a store, so to overcome this problem Starbucks started leasing the land for long term periods. In our opinion, it was a quit impressive move to cut down its fixed cost. Secondly they observed that to get the license was too costly for them, so they made contracts with the partners who had license with them.
Financing
For the financing, Starbucks instead of taking loans preferred raising the equity. It was a better idea to generate capital because they did not have to pay any short term and long term interests against the borrowings.
Q. No. 04
What were the key issues faced by Starbucks in 2004?
Every company faces major challenges, even companies that are as successful as Starbucks. Although they have an outstanding reputation, have won many awards like top sustainable retail store award and most ethical company award etc, and even give back to their community, they are still facing challenges like any other company.
Following are the most obvious challenges that Starbucks is dealing with:-
- Schultz was overflowing with the ideas for the company, early on he noticed that first-time customers sometimes felt uneasy in the stores because of their lack of knowledge about fine coffees and because store employees sometimes came across as a little arrogant or superior to coffee beginner.
- Howard Schultz when came back from Italy shared his ideas for modifying the format of Starbucks’ store with Baldwin and Gordon Bowker. But instead of winning approval for trying out some of his ideas, Schultz encountered strong resistance but after a year Schultz succeeded in winning the approval from Baldwin and Bowker.
- After sometime Baldwin and Bowker again went against the ideas of Schultz so he became so frustrated and left Starbucks in late 1985 to open his own separate Espresso Bars in high-traffic down town locations.
- Schultz acquired Starbucks in 1987 and after the 20 months of acquiring, some employees felt unappreciated that there was a feeling of prior management had abandoned them. So, Schultz decided to make building a new relationship of mutual respect between employees and management.
- Starbucks lost its money when it expanded market to Chicago because in Chicago that was the first downtown store opened on to the street rather than into the lobby of the building where it was located; in the winter months, customers were hesitant to go out in the wind and cold to acquire a cup of coffee. It was expensive to supply fresh coffee to the Chicago stores from Seattle warehouse.
- The challenge to Starbucks, in Schultz view, was how to attract, motivate, and reward store employees in a manner that would make Starbucks a company that people would want to work for and that would generate enthusiastic commitment and higher level of customer service.
- A values and principles “crisis” arose at Starbucks in 1989 when customers starting requesting nonfat milk in making Cappuccinos and lattes (an espresso coffee with frothy steamed milk) So, Starbucks started selling both fat milk and nonfat milk Cappuccinos and lattes.
- They were facing the issue of Wi-Fi (wireless internet service) in 2002, the number of accesses was in the millions by T-Mobile; internal research showed that the average connection last approximately 45 minutes So, in October 2003, Starbucks announced that they will expand Wi-Fi capability to additional locations and would have 2700 stores equipped with wireless Internet access by year end.
- They were also facing challenges from their competitors. In 2003 there were an estimated 14000 specialty coffee outlets in the United States but they were not competent enough to exert pressure at Starbucks.
Q. No. 05
What recommendations would you make to Howard Schultz to sustain the company growth and support strong financial performance in the years ahead?
Recommendations
After analyzing the whole case study, we became able to give few suggestions to Howard Schultz which can be handy to sustain the growth and support strong financial performance in the forthcoming years:-
- He should spend more budgets on advertisement of products.
- He should bring innovations in his products because we saw in this case study that he was inspired by espresso bars so he imitated the whole theme of Italian espresso bars and the idea of dark roasted bean was an older one as well.
- Before entering to any new geographical region he should study the market environment of that particular region as we saw that at Chicago there was an issue of cold weather and his store was at down-town-street. Furthermore, the labor rates and rents of building were higher as well.
- At the stores Starbucks’ technique to teach customers about how to make coffee was not a good idea because it does not support their business model. Therefore, it should be avoided in future.
Above elaborated things were having details about the strategies of Starbucks which drove it for the Global dominance till 2004. Starbucks is in fact the recognized and respected brand in the world and if it can overcome the shortcomings which we identified then nobody can create bother for it to be successful and there will be no point left as a mistake on its part.
Reference
Case Study “Starbucks in 2004: Driving for Global Dominance” written by Arthur A. Thompson, Amit J. Shah and Thomas F. Hawk.
Suppliers’ bargaining power
Glad to supply inputs
New entrants
High entry barriers
Bargaining power of buyers
Higher level of attraction
Substitute product
Minor pressure building
Competitors
Exerting weak pressure
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by
enigerkrain18 (student)
