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External Analysis of Starbucks 1

RUNNING HEAD: STARBUCKS

External Environmental Analysis of Starbucks and the Coffee Industry

Harold Brown

Strategic Management MGMT 4340

Dr. Nwabueze

March 3, 2011


Contents 1.0.0. Executive Summary ...................................................................................................................... 5

2.0.0. Company History ................................................................................................................................ 8

2.1.0. Background ....................................................................................................................................... 12

Table 1: Starbucks Revenue Trends 2005-2010 ..................................................................................... 12

2.2.0. Purpose of This Study ....................................................................................................................... 14

3.0.0. External Analysis .............................................................................................................................. 15

Diagram 1: The Components of a Coffee Firm’s Macroenvironment .................................................... 16

3.1.0. General Environmental Analysis ...................................................................................................... 16

3.1.1. Demographic Segment ...................................................................................................................... 16

Table 2: Tracking Measures of Coffee Demographics ........................................................................... 17

3.1.2. Economic Segment ........................................................................................................................... 18

3.1.3. Political/Legal Segment .................................................................................................................... 19

3.1.4. Socio-Cultural Segment .................................................................................................................... 19

3.1.5. Technological Segment ..................................................................................................................... 20

3.1.6. Global Segment ................................................................................................................................. 21

3.1.8. Driving Forces .................................................................................................................................. 22

Diagram 2: Effect of Driving Forces on the Coffee Industry ................................................................. 25

3.2.0. Industry Analysis .............................................................................................................................. 25

3.2.1. Description of the Industry ............................................................................................................... 26

3.2.2. Industry Dominant Economic Features ............................................................................................. 26

Diagram 3: Coffee Industry Dominant Economic Features .................................................................... 27

3.2.3. Market Size ....................................................................................................................................... 27

3.2.4. Market Growth Rate ......................................................................................................................... 28

Table 3: Global Hot Drink Data for Coffee Industry: Global hot drinks market value: $ millio09 ... 28

Table 4: Global Hot Drink Data for Coffee Industry .............................................................................. 28

Table 6: U.S. Hot Drink Data for Coffee Industry .................................................................................. 29

United States Hot Drinks Market Volume .............................................................................................. 29

3.2.5 Industry Trends .................................................................................................................................. 30

3.2.6. Five Forces Analysis ......................................................................................................................... 31

Diagram 3: Five Competitive Forces in the Coffee Industry .................................................................. 32

3.2.6.1. Threat of New Entrants .................................................................................................................. 32


3.2.6.2. Power of Suppliers ......................................................................................................................... 33

3.2.6.3. Power of Buyers ............................................................................................................................. 33

3.6.2.4. Power of Substitutes ...................................................................................................................... 33

3.2.6.5. Intensity of Rivalry ........................................................................................................................ 34

3.2.7. Summary of Industry Analysis ......................................................................................................... 34

3.3.0. Competition Analysis ........................................................................................................................ 34

3.3.1. Industry Competitors ........................................................................................................................ 35

Table 7: Direct Competitors to Starbucks ............................................................................................... 35

Diagram 4: Strategic Group Map of Coffee Industry ............................................................................. 36

3.3.2. Rivals Anticipated Strategic Moves .................................................................................................. 36

3.3.3. Summary of Competitive Analysis ................................................................................................... 37

3.3.4. Key Success Factors ......................................................................................................................... 38

Diagram 5: Key Success Factors for Survival in the Coffee Industry .................................................... 39

4.0.0. Internal Analysis ............................................................................................................................... 39

4.1.0. Organizational Analysis .................................................................................................................... 40

Diagram 6: Organizational Analysis Framework Model of Starbucks ..................................................... 41

4.1.1. Corporate Mission ............................................................................................................................. 41

4.1.2. Products and Services ....................................................................................................................... 43

4.1.3. Leadership ......................................................................................................................................... 47

4.1.4. Organizational Culture ...................................................................................................................... 49

4.1.5. Structure ............................................................................................................................................ 50

4.1.6. Strategy ............................................................................................................................................. 51

Diagram 7: Five Generic Competitive Strategies ................................................................................... 51

4.1.7. Summary of Organizational Analysis ............................................................................................... 52

4.1.8. Analysis of Firm Resources .............................................................................................................. 55

4.1.8.1. Tangible Resources ........................................................................................................................ 56

4.1.8.2. Intangible Resources ...................................................................................................................... 56

4.1.8.3. Capabilities .................................................................................................................................... 56

4.1.8.4. Core Competencies and Sustainable Advantages .......................................................................... 57

4.1.8.5. Summary of Firms Resources ........................................................................................................ 58

4.2.0. Financial Analysis ............................................................................................................................. 58

4.2.1. Valuation Analysis ............................................................................................................................ 58


Table 8: Valuation Analysis of Starbucks ............................................................................................... 59

4.2.2. Growth Analysis ............................................................................................................................... 59

Table 9: Growth Analysis Ratios for Starbucks ...................................................................................... 60

4.2.3. Profitability Analysis ........................................................................................................................ 61

Table 10: Profitability Ratio Analysis for Starbucks .............................................................................. 61

4.2.4. Financial Strength Analysis .............................................................................................................. 61

Table 11: Starbucks Balance Sheet ......................................................................................................... 62

4.2.5. Management Efficiency Analysis ..................................................................................................... 64

4.2.6. Summary of Financial Analysis ........................................................................................................ 65

5.0.0. SWOT Analysis ................................................................................................................................ 65

Diagram 9: SWOT Matrix for Starbucks ................................................................................................ 66

5.1.0. Strengths ........................................................................................................................................... 66

5.2.0. Weaknesses ....................................................................................................................................... 67

5.3.0. Opportunities ..................................................................................................................................... 68

5.4.0. Threats............................................................................................................................................... 68

6.0.0. Recommendations ............................................................................................................................. 69

6.1.0. Recommendation 1 (External) .......................................................................................................... 69

6.2.0. Recommendation 2 (Internal) ........................................................................................................... 71

Conclusion .................................................................................................................................................. 72

7.0.0 References .................................................................................................................................. 75


1.0.0. Executive Summary

Starbucks is the global leader of the coffee industry in bringing new and innovative products to

market in convenient and easily accessible locations. This paper will provide a detailed analysis

of the coffee industry and the external environment which it operates in as well as a

comprehensive internal analysis aimed at specific evaluation of Starbucks and its performance.

Although Starbucks started from the humble beginnings of three friends that liked high

quality, premium roasted coffee it has since turned into a leader in the coffee industry. This is

due largely through the efforts and vision of Howard Schultz. His success and leadership of the

industry has been compared to what Ray Kroc did to McDonald’s and the fast food industry.

Today Starbucks serves as a model that many other successful rivals try to emulate or improve

on. Starbucks is powered by their continual product innovation, customer service aptitude,

ability to expand globally, and successfully select locations.

Coffee and/or tea are consumed globally by most of the population. This coupled with

the forces that drive change in the industry result in a net positive force that makes the industry

attractive to businesses. An analysis utilizing Porter’s five-forces model outlining competitive

pressures will show that the coffee industry is able to provide for attractive profits by firms in the

industry. The overall competitive pressures are moderate and firms can be successful but they

will have to be efficient and effective in the strategies that they undertake or they risk being

removed from the industry by consumers.

Starbucks enjoys a favorable position in the strategic group that it is in. Starbucks has a

high priced, high quality product with a wide breadth of product offerings. They are the only

firm in this position. Most other firms offer moderate or few product offerings at a lower price


point. Starbucks has been able to build its brand image and market power while in this position

which has yielded annual profits. As Starbucks is in the strategic group position of power, the

expected moves of rivals are all designed to keep up with Starbucks. No firms have been able to

successfully produce new products that meet market demand in as convenient locations as

Starbucks has been able to offer.

Starbucks also enjoys critical know how and experience in the key success factors that

the coffee industry demands of successful firms. Starbucks keenly utilizes technology to

enhance customer experience, selects convenient locations, innovates products that are in

demand and profitable, and continually looks to conquer new markets and market share ahead of

rivals.

The Starbucks mission is to nurture the human spirit of everyone around the globe by

offering the finest coffee, tea, and food products in a friendly and inviting atmosphere that serves

as a home away from home. Starbucks does this through a decentralized leadership style that

emphasizes lower level decision making and information sharing to promote product innovation

and customer service. The customer service is a key component to the organizational culture of

rewarding and treating employees as partners in the business. The structure of Starbucks is one

of geographical business units that allow Starbucks to enter into any market and achieve the

think local, act local expansion strategy.

Starbucks is able to leverage its resources, tangible and intangible, to create competitive

capabilities and core competencies that allow for strategy execution. Starbucks achieves this by

utilizing its human capital and expertise to constantly strive for excellence in product innovation.

Furthermore, Starbucks is able to internally fund strategic initiatives from free cash flow


produced from sound financial performance. Starbucks’s financial ratios have increased over the

last three years due partially to a recovered general economy and partially to the return of

Howard Schultz to the leadership position in the company. These financial ratio increases have

positioned Starbucks in a greater financial situation.

The SWOT analysis of Starbucks will reveal that the strength of Starbucks lies within

their strong financial performance based on their retail store operations. The weakness of

Starbucks is an over reliance on a saturated U.S. market with a declining market share as a result

from intensified rivalry in the marketplace. This weakness can be overcome by utilizing

Starbucks’s strong finances to realize the present opportunities to expand into emerging markets.

To realize the present opportunities Starbucks will need to implement and execute two

critical objectives. The first is to continue to be an industry leader in product innovation. This

will serve to further differentiate Starbucks from rivals and will also open new customer bases

for the new products. The second objective will be to expand globally into emerging economic

markets using a franchising approach. Starbucks will be able to create revenue streams via

franchise fees while the markets mature and retail revenues increase. By implementing both of

these strategic objectives Starbucks will continue to be the leader in the coffee industry and

further enhance its brand power and market position.


External Environmental Analysis of Starbucks and the Coffee Industry

2.0.0. Company History

Starbucks begin doing business in 1971 when three partners teamed up to create a

specialty coffee roasting company in the Pikes Peak Market area in Seattle, Washington. The

company was originally called Starbucks Coffee, Tea, and Spice and was founded by Jerry

Baldwin, Zev Siegel, and Gordon Bowker for a startup fee of $9,050 (Thompson, Jr. &

Strickland, 1999). The Starbucks name is said to be derived from the coffee- loving First Mate

in Herman Melville’s Moby Dick. The logo is that of a twin-tailed siren from Greek mythology

lore (Starbucks, 2011). The siren, in the Homeric view, was a creature that was known to live in

the seas and enchant passing sailors with their song, much like the alluring call of morning

coffee fixes (Homer, 1942). Both the logo and the Pikes Peak shop carried out a nautical theme

that the partners felt embraced the tradition of the early coffee trade and the romantic nature of

the high seas. While all three shared a love for gourmet coffees and teas, none of the partners

had much of a business background. Baldwin and Siegel were English and History teachers

respectively and Bowker was a creative writer (Thompson, Jr. & Strickland, 1999).

The inspiration for the business was a small coffee shop located in Berkley, California

named Peet’s Coffee and Tea. The business was managed and named after its Dutch immigrant

proprietor Alfred Peet. Peet’s would have a huge impact on the initial iteration of the Starbucks

business model. Peet’s started in 1966 and specialized in dark roasting coffee in the European

style to bring out the full flavors of the coffee bean and teaching its loyal customer base proper

techniques on how to grind and properly brew coffee . The partners had all spend considerable

time in Peet’s both buying product and also listening to Peet pass his expert knowledge in the

benefits of bean quality and the importance of roasting to all who would listen (Thompson, Jr. &


Strickland, 1999). Peet’s model was one the Starbucks would emulate in the Pikes Peak

location. Starbucks would only offer whole bean coffee along with other coffee related products

to its customers and not serve fresh brewed, ready to drink beverages. Initially, Starbucks would

buy all of its beans from Peet’s for resale to the public before buying its own roaster from a store

in Holland (Thompson, Jr. & Strickland, 1999).

In the beginning only Siegel was a paid employee of the company and would work the

shop as the resident retail expert, while Baldwin and Bowker kept their day jobs and helped out

as time would allow. Baldwin served as the bookkeeper and constantly strived to increase his

knowledge of all things coffee, and Bowker’s responsibilities were centered on being the “magic,

mystery, and romance man” (Thompson, Jr. & Strickland, 1999). Starbucks would expand in the

Seattle area and have four locations by the early 1980’s and never once have a non-profitable

year. The strain of running the business would eventually lead to burnout with Siegel and

Bowker devoted most of his focus on other outside business enterprises. Baldwin would

eventually take over as CEO and manage the day-to-day functions of the company (Thompson,

Jr. & Strickland, 1999).

In 1981 Howard Schultz would make his first visit to Starbucks (cite). Schultz was the

vice president and general manager for the US division of Hammarplast which manufactured

high-end kitchen equipment and housewares (Starbucks, 2011). Schultz had noticed that

Starbucks was ordering more of a certain drip coffee maker than other large clients like Macy’s

(Thompson, Jr. & Strickland, 1999). Schultz was immediately smitten by Starbucks operations

and business culture. One author has compared this meeting and the way it changed an entire

industry and corporation with that between Ray Kroc and McDonald’s (Garza, 2010). Schultz

was determined to work for Starbucks, and after a long negotiating process and much doubt with


the Starbucks partners, Schultz was hired as head of marketing (Thompson, Jr. & Strickland,

1999).

After spending adequate time learning the coffee retail business, Schultz traveled to an

international housewares expo in Milan, Italy in 1983. During this trip Schultz would visit many

of the local espresso bars in the city and marvel at the business model and the simple perfection

of the café latte (Thompson, Jr. & Strickland, 1999). Upon his arrival back in Seattle, Schultz

felt he had a sure fire way to grow Starbucks by changing the format to an espresso bar that also

sold coffee and housewares. Instead of approval and adulation, the Starbucks partners shot down

the idea holding firm that they were a coffee retailer and not a restaurant or bar of any type.

Schultz would take the next year to convince Baldwin on the merits of serving Italian-style

coffee beverages inside of Starbucks. In 1984 Baldwin accepted, and the sixth store to open up,

in downtown Seattle, would have 300 square feet of space to serve coffee. The experiment was a

success and this location outperformed all of the other stores (Thompson, Jr. & Strickland,

1999). Even though Schultz could, and would, provide daily figures quantifying the validity of

his argument, Baldwin was not willing to except the change in format and ultimately ruled

against Schultz. In 1985, at the age of 33, Schultz decided to leave Starbucks to create his own

company and business format (Ramsey, 1987).

The first step would be to raise capital. Schultz connected with a corporate lawyer named

Scott Greenberg who had experience in raising capital for new ventures. Schultz made

presentations to 242 potential investors, most of which passed at the opportunity citing concerns

that coffee consumption was on the decline or that they did not believe that consumers would be

willing to pay $1.50 for a coffee beverage (Thompson, Jr. & Strickland, 1999). After raising

$1.65 million dollars from 30 different investors, one of which was Starbucks, Schultz was


nearly ready. The next step would be to hire Dave Olsen who had over 10 years’ experience in

owning and operating a coffee bar named Café Allegro (Thompson, Jr. & Strickland, 1999). Il

Giornale opened two stores in Seattle in 1986, and one store in Vancouver, British Columbia in

1987 to test the expansion capabilities of the business model outside of Seattle (Ramsey, 1987).

Also in 1987, the remaining partners of Starbucks had decided that they were done with the

company and wanted to divest themselves and sell off the business. Schultz saw the opportunity

and made a successful bid. Starbucks Coffee, Tea, and Spice and Il Giornale would become one

business and be named Starbucks Corporation with Schultz as the CEO and president (Starbucks,

2011).

Beginning in 1987, Schultz unveiled an aggressive 5-year plan to open 125 stores in new,

large downtown markets with projected revenues in 1992 at $60 million dollars (Thompson, Jr.

& Strickland, 1999). The next market outside of Seattle would be Chicago with Portland, Los

Angeles, and San Francisco coming right after. Starbucks would open 150 stores, outperforming

the 125 store projection, in the five years even though many of the years in this period Starbucks

reported losses (Thompson, Jr. & Strickland, 1999). Schultz firmly believed that Starbucks had

to be a great place to work in order to provide the atmosphere and service that he envisioned.

During this 5-year period, Schultz launched a number of initiatives to accomplish this objective.

In 1988 Starbucks decided it would offer all employees that worked more than 20 hours per

week the same benefits that full-time employees received (Starbucks, 2011). This later came to

include full coverage to terminally ill employees no longer able to work until government

benefits took over or the death occurred. Starting in 1991, Starbucks began offering employee

stock options to all employees, and in 1995 would be expanded to include employee stock

purchase programs (Thompson, Jr. & Strickland, 1999).


The next major step forward for Starbucks was the initial public offering (IPO) held in

June 1992. The success of the IPO enabled Starbucks to unveil an even more aggressive

expansion plan. Starbucks would target a large, demographically favorable region that would fit

into existing company operations capabilities, and this target area would serve as a “hub” that

would spawn many more satellite locations feeding off of the hub (Thompson, Jr. & Strickland,

1999). The strategy was a success allowing for: 677 locations open in 1995, 3,501 locations

open in 2000, and 16, 858 locations open in 2010 (Starbucks, 2011).

2.1.0. Background

Starbucks continues to change and innovate in the coffee industry. Over the last five

years Starbucks has continued to be successful firm in spite of pressures from economic realities

and competitors. Starbucks succeeds on three main fronts: financially, strategically, and

competitively. Table 1 on page 10 expresses the revenues and the percent change in revenues as

compared to the previous year for the last five full years:

Table 1: Starbucks Revenue Trends 2005-2010

Year Total Revenues ∆ Change in Revenues

2006 $7.8 Billion 22%

2007 $9.4 Billion 21%

2008 $10.4 Billion 10%

2009 $9.8 Billion -6%


2010 $10.7 Billion 10%

Source: Starbucks, 2011

With the exception of 2009, Starbucks has outperformed the previous year with at least a

10% increase in total revenues. Starbucks was affected, like most of the global economy, by the

2009 economic slowdown and posted a decrease in revenues by 6%. The revenues did increase

for 2010 and the total revenues of $10.7 Billion dollars is an all-time high (Starbucks, 2011).

Over the last five years Starbucks has continued its strategy of aggressive expansion in

metropolitan US markets as well as rapid growth into international markets. As of 2010, the total

store locations are up to 16,858 with 11,131 domestic and 5,727 stores internationally. In 2006

Starbucks had 12,440 total stores; this is over a 4,400 location net increase in a five year period

(Starbucks, 2011). Starbucks also continues to market and grow the Starbucks card through

cross promotions and in-store marketing. In the first quarter of 2006, Starbucks card new card

sales and card reloads amounted to $333,500,000, while in the first quarter of 2011 card revenues

accounted for $703,000,000 in sales (Starbucks, 2011). One of the latest strategic moves that

Starbucks has undertaken is a Memorandum of Understanding (MoU) with Tata Coffee Limited

from India. This MoU will give Starbucks a foot into the proverbial door of the India coffee

market, both to purchase Arabica beans and to serve coffee beverages to the Indian market

through retail outlets and restaurant and hotel collaboration (Starbucks, 2011).

Competitively, Starbucks continues to innovate and bring to market new product

offerings each quarter. This includes products like flavored VIA ready brew coffee, hot artesian

sandwiches, hot breakfast options, and Vivanno smoothies (Starbucks, 2011). Starbucks also

continues to be an employee friendly company as evidenced by selection as a top company to


work for by Fortune for the last five years (Fortune, 2011). Keeping a committed and

enthusiastic staff has allowed Starbucks to maintain a relatively low turnover rate and maintain

high levels of customer service (Thompson, Jr. & Strickland, 1999). Starbucks also continues to

search out new opportunities to expand brand awareness. In January 2011, Starbucks announced

a cross promotion with Courtesy Products to place and stock Starbucks single serve coffee in

over 500,000 luxury and premium hotels (Starbucks, 2011).

2.2.0. Purpose of This Study

The purpose of this study is to engage in an external analysis of the coffee industry to

examine how the external market affects Starbucks Corporation and to answer seven critical

questions on the coffee industry and the competitive environment that Starbucks works in

(Gamble & Thompson, Jr., 2011). These questions are:

1. What are the industry’s economic characteristics?

2. What are the types and relative strength of the economic forces that industry members

face?

3. What are the industry driving forces and how do these driving forces act on the industry?

4. What positions in the market do rivals occupy?

5. What strategic moves are rivals willing and able to make?

6. What are the Key Success Factors for successful competition?

7. Does the industry offer good prospects for profitability?

The answer for these questions will lead into future work of an internal analysis of Starbucks

as an organization and also allow for the author to make strategic recommendations to Starbucks

on the coffee industry. The information for this study will come from academic and financial


resources including company websites, financial analysis websites, news releases, academic

journals, and government filed reports.

3.0.0. External Analysis

The external analysis is divided into two main components. These components are the

general environmental analysis and the industry analysis. Collectively these are the external

analysis and through exploration and examination can explain the competitive environment of

the industry where the company operates in an attempt to make profits. The external analysis

always focuses on the industry and not the individual firm.

Diagram 1 on page 16 shows the two major components that comprise the external

environment of the coffee industry. The Macroenvironment is the focus of the general

environmental analysis and is comprised of the outer five segments. The inner ring is considered

to be the industry analysis and consists of Porter’s Five Forces which act individually and

collectively on the company.


Diagram 1: The Components of a Coffee Firm’s Macroenvironment

Source: Gamble & Thompson, Jr., 2011

3.1.0. General Environmental Analysis

The general environmental analysis consists of the outer ring of the Macroenvironment

and the five main segments. The segments are comprised of: general economic conditions

(economic), legislative and regulations (political/legal), societal values and lifestyle (socio-

cultural), technology (technological), and population demographics (demographic) (Gamble &

Thompson, Jr., 2011). The general environmental analysis has also been referred to as a PEST

or PESTEL analysis (Oxford University Press, 2007).

3.1.1. Demographic Segment

The demographic segment of the coffee industry is involved with the population

segments and characteristics of the consumers that purchase product from firms in the industry.

These characteristics include age, race, gender, income, and education. These characteristics


affect the tastes and buying habits of the industry’s consumer base. Coffee drinkers over age 59

have different preferences than the 18-24 ages demographic. Also, the amount of coffee

consumed and the times of day for consumption vary with demographic characteristics (National

Coffee Association of the USA, Inc., 2008). The coffee industry will continue to innovate

product offerings in an attempt to gain large demographic market shares of the different classes

of consumers. This will be done by changing the preferences of targeted demographics like

increasing gourmet coffee consumption in mature customers or by expanding into untapped

coffee markets like Chinese tea drinkers. The coffee industry demographics segment can be

visualized by table 2 on page 17.

Table 2: Tracking Measures of Coffee Demographics

By Type of Coffee

• Daily, weekly, annual

• 50-year trending

By Age

• Daily, weekly, annual

• By coffee type

• Total, Traditional, Gourmet

By Region

• Total, Traditional, Gourmet

By Time of Day

• By coffee type

Driver and Barriers

• Consumer attitudes

• By age

• Health messages

• Key Driver Analysis

Coffee Origins/Certifications

• Country associations

• Certification awareness

Additives and Flavorings

• Breakout of additives by type and by age


• By age

• By location and share of cups

By Location

• In-home vs. out-of-home

• By age

• By share of cups

• Consumer flavor preferences, added and pre-flavored

Consumer Profiles

• Demographics, traditional vs.gourmet drinkers

• Gourmet drinkers over time

• Non-drinkers

Source: NCA Market Research

3.1.2. Economic Segment

The economic segment is characterized by the general economic conditions in the non-

controllable environment that the coffee industry operates in. The most notable factor is the

recent global economic recession of 2008 and 2009. The recession affected both businesses with

rising operational costs and lower profit margins, and consumers of the products that have seen

product prices rise while wages remain the same and unemployment levels increase (Bureau of

Labor Statistics, 2011). The outlook is improving and as confidence grows, the global economy

will improve (World Bank, 2010). The coffee industry competes on two levels, the

undifferentiated traditional coffee offering and gourmet, Italian-style coffee beverages. By

offering both lower cost coffee options to fringe customers and higher cost options to more

affluent clientele, the coffee industry will attempt to serve coffee to all that want or need it. In

2008 during the economic crisis as consumers were making severe spending cutbacks, coffee

drinkers in the US still drank the same amount of coffee, 3.3 cups per day on average, but simply

opted for the lower cost options (Moreno, 2008).


3.1.3. Political/Legal Segment

The coffee industry faces many types of political and legal pressures in the

Macroenvironment. Coffee firms import coffee beans from a variety of countries, each with

their own respective customs and tariff regulations. On an international scale, these firms must

gain expertise on how to import beans from each different country and keep detailed tabs on

political upheavals, changes to policies, and be fearful of foreign government seizing company

assets.

On the legal front, firms must file for all necessary forms and permits to be authorized to

do business. This includes tax forms, business entity applications, legal contracts, store and

factory leases, etc. The local and federal governments will also dictate certain laws and

regulations onto the businesses. These include labor laws, food handling regulations, and

business practices restrictions as in the arena of marketing and advertising.

3.1.4. Socio-Cultural Segment

The socio-cultural element focuses on how the consumers exert forces on the industry

and how the firms do business. As the consumer outcry for fair practices have grown and

evolved, so to have many of the firms operating practices (Northey, 2007). Starbucks

implemented a C.A.F.E. program to address concerns about the social responsibility of the

industry to perpetuate sustainability of coffee bean growers. The C.A.F.E. program looks

establish quality criteria and share responsibility throughout the supply chain (ICO, 2011). Other

firms use third party certifications in an effort to be more social responsible and will label their

product as a badge of honor. These social responsible accepted labels include the Fair-trade

Certificate, The Rainforest Alliance certification, and the Organic certification (ICO, 2011).


As consumers become increasing more educated and health conscious, the industry must

constantly monitor the environment and adapt product offerings to meet demand. Although

companies like Starbucks initially resisted using anything other than whole-milk in coffee

beverage preparation, they eventually gave in to pressure and adopted 2% milk as the standard

and also offer non-fat milk as well (Thompson, Jr. & Strickland, 1999). The next big issue on

the consumer health watch radar is sugar intake (Wall Street Journal, 2009). Given this pressure,

industry producers will need to either reduce sugar levels in beverages and food offerings, or

come up with new product that will satisfy the consumer both nutritiously and flavor-wise.

3.1.5. Technological Segment

The technological area of the Macroenvironment is a major factor in the coffee industry.

The main influences in this portion of the environment are technology as it relates to customer

interaction to the business, product innovation and product service, and customer ambience.

Customers interact with the industry in a number of ways. Technological improvements allow

for firms to directly market new product offerings to consumers by way of text messages, emails,

and social network sites (Buckstein, 2010). Technology is readily available to all firms in the

industry for relatively lower cost than traditional advertising. Industry firm Dunkin Donuts has

experimented with on-counter digital billboards that advertise messages to drive customers back

to the store for same day purchases (Steel, 2008).

Product innovation is another important aspect of the technology segment. Firms must

strive to keep pace with customer tastes and rivals. Technology allows for changes to product

mix to compete in new market segments like Starbuck’s VIA ready brew offering (Starbucks,

2011). Technology also improves the way firms can produce product through new machines and


more efficient processes which will lead to improved service to the end consumer. The

companies that stay on the cutting edge with process and equipment, like bean roasters and

brewing machines, will have an advantage. The industry is also influenced to utilize technology

to improve the overall customer experience. This includes the use of Wi-Fi internet capability

services as a draw to customers that can utilize the technology for business or personal purposes

(Oliviera, 2011). Keeping customers in store for longer periods of time will result in more sales.

3.1.6. Global Segment

The global segment of the Macroenvironment centers on the prospects of coffee firms

operating on a global scale. The coffee comes from various parts of the world and in varying

types and qualities. The most popular coffee types are Arabica, Robusta, or Liberica bean and are

grown primarily in Africa, Central America, and South America (ICO, 2011). The global

segment also refers to the quantity of coffee drinkers across the globe.

On a global scale, the demographic characteristics will vary as well. The coffee industry

sees this as an opportunity to increase market share as it has previously in the US market. The

prime example of this is Starbucks introducing gourmet, Italian-style coffee beverages to the

domestic populace (Thompson, Jr. & Strickland, 1999). The coffee industry has recently made

headway into converting tea drinkers in the United Kingdom to gourmet coffee offerings (Bell,

2005). Multinational coffee houses like Gloria Jeans and Starbucks have targeted Russia and its

growing capitalist economy for retail store expansion (Reuters, 2008). Furthermore, coffee giant

Starbucks has set its sights on the one billion plus Chinese tea drinkers, and looks to change

preferences to gourmet coffee beverages (Adamy, 2006).


3.1.7. Summary of General Environmental Analysis

The coffee industry will continue to look for and find ways to increase to demographic

that it services. This will be done with continued product innovation and increased product

offerings to fit the consumer’s demand. The industry will also continue to expand globally into

new markets to attract a larger number of customers. The stabilization and improvement of the

global economic condition will lead to an increase of gourmet beverage consumption among

fringe consumers. Also, the competing firms must continue to be ever vigilant and monitor the

global political landscape that affects coffee trade viability, retail markets, and sustainability

efforts in social responsibility to all users of the value chain.

3.1.8. Driving Forces

Driving forces are defined as change agents that have the biggest influence in reshaping

the industry landscape and altering competitive conditions (Gamble & Thompson, Jr., 2011).

There are three components to the analysis of industry driving forces. The first is to identify what

the three to four most influencing forces are. These are referred to as the industry’s determinant

driving forces. The second step is to assess how the determinant driving forces individually and

collectively act upon the industry. The final step is to determine strategy changes that the

industry will need to make in order to counterbalance the effect of the determinant driving forces

(Gamble & Thompson, Jr., 2011).

The first step is to identify the four major industry driving forces. There are thirteen

forces that are generally believed to affect any given industry, however on average only three to

four will be able to be considered as determinant driving forces (Gamble & Thompson, Jr.,

2011). The four determinant driving forces for the coffee industry are: product innovation,


changing societal concerns, attitudes and lifestyles, growing buyer preference for differentiated

products, and increasing globalization.

The first driving force is product innovation. The industry must continuously strive to

innovate new product offerings for two reasons: to continue to attract new customers that do not

buy from the current product mix and to offer differentiated products from rival firms. The

industry needs to listen to its customer base as they are one half of the product innovation

equation. The customers know what they want and will sound off by making current items

popular and successful or by giving in-store or online feedback as to what products and services

they would like. Overall this driving force has a positive effect on the industry as it forces firms

to lead follow or get out of the way. The successful firm will be one that is able to continuously

bring new, successful products to market.

The second driving force is changing societal concerns, attitudes, and lifestyles. As

discussed previously, societal changes related to the coffee industry center on two major topics.

These are the trends that consumers are increasingly demanding healthy alternatives to full-fat,

high-sugar coffee drinks, and the growing concern on the addictive properties of coffee and how

long term coffee consumption may affect health (Laitala, Kaprio, & Silventoinen, 2008). The

coffee industry has responded over the years as consumers have demanded healthy alternatives.

In most coffee houses the customer will be able to choose between whole milk and non-fat milk,

with or without whipped cream, and caffeine or decaf. Recent studies have shown that moderate

coffee consumption can have health benefits like reducing the risks of common ailments like:

men’s prostate cancer, stroke, Alzheimer's, dementia, Parkinson's, endometrial cancer, colon

cancer and gallstones (Washington Post, 2009). This driving force acts on the industry in a

positive manner as it forces firms to bring new, desirable products to market which will result in


additional sales and revenues. Also, the industry can now choose from multiple studies to show

that their product is actually beneficial. These studies would not have been done if not for this

driving force and concerns on how coffee affects the consumers.

The third driving force is growing buyer preference for differentiated products. This

force acts on the industry to require firms to continually stay in touch with buyer demand. If

every coffeehouse offered the same product mix then consumers would simply go to the closest

store for their purchases. By differentiating products, customers will travel to a certain firm or

even a certain location of that firm to get their favorite products. Differentiation is a business

strategy to give firms a competitive advantage (Gamble & Thompson, Jr., 2011). In this aspect

differentiation of product is required to be an industry leader. This driving force acts upon the

industry in a negative way. Firms must have considerable industry expertise and know how to

develop new products. Also, large amounts of capital will be required to develop, design,

market, and produce new products in the industry.

The final determinant driving force is globalization. Globalization as a force acts to open

new markets and new consumers to firms in the industry. Once firms have adequately reached a

critical mass in a country or region, they must seek new opportunities to continue to grow their

business. The face and definition of how companies will act as globalization evolves is subject

to debate, but firms will need to continue to grow across the globe to increase revenue

production (Laudicina, 2010). Firms in the coffee industry will view increased globalization as a

way to increase market share by changing consumer preferences (Bell, 2005) or by expanding

into new untapped markets (Adamy, 2006). This force acts on the industry in a strong positive

manner as continued increases in globalization allow for continued increases in opportunities by

way of market expansion.


The collective push of the driving forces is in a positive direction. The lone negative

push comes from firms in the industry that are not creative or innovative and are relegated to

follower or generic low cost provider status in the industry. Diagram 2 shows the net affect that

the determinant driving forces have on the coffee industry:

Diagram 2: Effect of Driving Forces on the Coffee Industry

, 2011

Source: Harold Brown, 2011

3.2.0. Industry Analysis

In the United States, approximately 150 million consumers purchase and drink coffee

beverages with 89% opting to brew coffee at home rather than purchase premade products from

retailers and coffee houses (Gamble & Thompson, Jr., 2011). The average coffee drinker

consumes 3.3 cups of coffee per day (Moreno, 2008). The amount of coffee that is consumed

has lead way to an increase in firms offering prepackaged coffee in retail locations and large

super market chains. The prepackaged coffee producers include lower cost options like Folgers

and Maxwell House, store brand alternatives like Archer Farms (Target) or Café Ole (HEB), and

premium brands like Starbucks and Seattle’s Best. Since the 1990’s, when Howard Schultz

Coffee Industry Product

Innovation

Globalization

Product Differentiation

Societal Concerns

Positive Driving Forces Negative Driving Forces


brought the idea and concept of an Italian Espresso bar to the United States, specialty coffee

sales have grown to 20% of industry revenues. The specialty coffee market has grown to over

$13.5 billion at an average annual growth rate of 32% between 2000 and 2007 (Gamble &

Thompson, Jr., 2011).

3.2.1. Description of the Industry

The coffee industry is comprised of three main segments. The first segment is the coffee

and tea roasting and manufacturing segment. The second segment is the ground and instant

coffee segment through retail and supermarket locations. The final segment is the coffee house

espresso bar and quick service food establishment segment.

3.2.2. Industry Dominant Economic Features

The dominant economic features of the coffee industry are characterized by ten general

economic characteristics. The predominant characteristics are market size and market growth

rate. Diagram 3 on page 27 outlines all ten dominant economic features.


Diagram 3: Coffee Industry Dominant Economic Features

Source: Gamble and Thompson, 2011

3.2.3. Market Size

The coffee industry is a sub-section of the hot drinks industry as defined by Datamonitor,

which also includes the tea industry as well (Datamonitor, 2010). The global hot drinks market

size was $81,432 million dollars for 2009 with a global volume of 5,374 million kilogram output.

The United States share of the hot drinks market for 2009 was $10,834 million dollars and 794

million kilograms (Datamonitor, 2010). Coffee accounts for 54.2% of total global hot drink

consumption, while the United States has a 68.7% of hot drinks as coffee. Europe is the leading

consumers of hot drinks at 44.6% of total consumption, while Americans gulp down 14.2% of

the world’s hot drinks (Datamonitor, 2010).

• Market size • Number of rivals • Scope of rivalry • Number of buyers • Differentiation • Product innovation • Demand-Supply • Technological change • Vertical integration • Economies of scale • Learning curves

Coffee Industry


3.2.4. Market Growth Rate

The market growth rate for the hot drink industry still shows expected increases. Over

the last five years both the global market and US market have grown at a fairly consistent clip

each year (Datamonitor, 2010) . The growth prospects are centered around firms being able to

innovate new products and for firms to expand globally and capture new emerging markets. The

following tables (tables 3-7, on pages 28 to 29) show the trends in the growth rate of industry

revenues and industry production:

Table 3: Global Hot Drink Data for Coffee Industry: Global hot drinks market value: $ millio09

Global Hot Drinks Market Value

Year $ in Millions % Growth 2005 58,862.3 - 2006 60,728.9 3.2% 2007 62,950.8 3.7% 2008 65,406.2 3.9% 2009 68,030.9 4.0%

CAGR 2005-2009 3.7%

source: Datamonitor

Table 4: Global Hot Drink Data for Coffee Industry

Global Hot Drinks Market Volume

Year Million Kilograms %

Growth 2005 4,899.8 - 2006 4,988.1 1.8% 2007 5,110.0 2.4% 2008 5,240.8 2.6% 2009 5,374.6 2.6%


CAGR 2005-2009 2.3%

Source: Datamonitor

Table 5: U.S. Hot Drink Data for Coffee Industry

United States Hot Drinks Market Value

Year $ in Millions % Growth 2005 8,933.7 - 2006 8,892.5 -0.5% 2007 9,091.2 2.2% 2008 9,381.3 3.2% 2009 9,672.6 3.1%

CAGR 2005-2009 2.0%

source: Datamonitor

Table 6: U.S. Hot Drink Data for Coffee Industry

United States Hot Drinks Market Volume

Year Million Kilograms % Growth 2005 754.4 - 2006 741.1 -1.8% 2007 757.1 2.2% 2008 776.8 2.6% 2009 793.8 2.2%

CAGR 2005-2009 1.3%

source: Datamonitor


3.2.5 Industry Trends

The industry trends refer to the remaining eight dominant economic features of the

industry. The number of rivals characteristic focuses on whether the industry is fragmented into

many small companies or if it is dominated by a few large companies (Gamble & Thompson, Jr.,

2011). The global landscape is much different than the US landscape as far as industry rivals.

The global market is considered to be fragmented with the top three firms having only 22.9% of

the total market, while the US market is considered to be trending towards consolidation with the

top three firms having 59.4% of the market volume (Datamonitor, 2010). The scope of rivalry

among competitors is global with the top market holding companies. These companies offer

products to all countries and regions throughout the world. The main distribution channel both

globally and in the US are the hypermarket and supermarket chains (Datamonitor, 2010).

The key buyers in the hot drinks market are the retailers of hot drinks products. These

include the specialty coffee houses, the hyper and supermarkets, and restaurant chains. The

primary buyers are the hyper and supermarkets which account of 80.4% of the market

(Datamonitor, 2010). With such a large share of the market resting with a few large market

chains, the number of buyers should be considered as consolidated. On the other side of the

equation are the suppliers. These are the growers of tea leaves, coffee beans, and cocoa beans.

Demand has continued to steadily increase over the last five years and prices have not fallen,

therefore there is not a surplus of capacity pushing prices and profits down.

Product innovation is key economic characteristic as does the pace of technological

change. Being a leader in product innovation will lead to stronger brand power and increased

customer satisfaction. Giving the customers what they want will also lead to increased revenues.

The firms that keep up with improvements in technology can utilize these new efficiencies to


improve portions of the supply chain and reduce drag to the value chain. Some firms are

experimenting with direct digital advertisement in stores, Wi-Fi enabled environments, social

networking as a marketing medium, and even mobile apps for handheld devices that will make

ordering and purchasing of product faster and more convenient (Starbucks, 2011).

Two other economic characteristics play a considerable role. The economies of scale that

the large multinational firms possess act as a barrier of entry to new entrants. These large firms

enjoy a cost advantage over small firms and also possess an advantage in supply chain activities

(Datamonitor, 2010). Certain large retail firms enjoy a significant advantage in learning and

experience curve effects. One firm, Starbucks, has a competitive advantage over rivals based on

their considerable ability to select, design, and market new locations in key demographic areas

(Thompson, Jr. & Strickland, 1999).

3.2.6. Five Forces Analysis

One of the widely held assessment tools of an industry’s competitive forces is the five-

forces model of competition created by Michael Porter (Gamble & Thompson, Jr., 2011). These

five forces are: the competitive force of buyer bargaining power, the competitive force of

substitute product, the competitive force of supplier bargaining power the competitive force of

potential new entrants, and the competitive force of rivalry among sellers (Porter, 1980).

Diagram 3 on page 32 illustrates the five competitive forces in the coffee industry model.


Diagram 3: Five Competitive Forces in the Coffee Industry


3.2.6.1. Threat of New Entrants

According to Datamonitor’s 2010 Hot Drinks industry report, the threat of new entrants

into the coffee industry is an average force. This is based on negligible switching costs for

consumers to purchase new product or lower priced product from competitors and easy access to

pre-existing distribution channels and suppliers, with very little regulation, act to strengthen the

forces and make the industry attractive to potential entrants. These forces are offset by brand

loyalty of established firms that also enjoy economies of scale that will be hard for new firms to

initially compete with. Also, established firms have high product innovation that will make it

hard for new firms to differentiate themselves. As these forces oppose each other, the net result

is threat of new entrants is moderate (Datamonitor, 2010).

Rivalry among Competing

Sellers STRONG

Substitutes WEAK

Suppliers MODERATE

New Entrants MODERATE

Buyers MODERATE


3.2.6.2. Power of Suppliers

The major suppliers to the industry are countries from Africa, South America, and Asia.

This is due to the fact that tea leaves and coffee beans must be grown in a certain climate. As

such, many of these supplying regions are lower economic countries. This coupled with the

amount of independent growers and undifferentiated quality of the product weakens the power of

the suppliers. Coffee beans are a commodity product and coffee prices are dictated by supply

and demand. The power of suppliers is also deemed to be moderate (Datamonitor, 2010).

3.2.6.3. Power of Buyers

The large hyper and supermarkets account for 80.4% of coffee and tea purchased in the

United States. These large chains have considerable price negotiating power as a buyer based on

the quantity of product they buy and the ability to shelve competing brands. Some product

differentiation exists based on brand power, quality, and taste which forces retailers to stock the

product choices that consumers are looking for even if it is more costly. In this aspect buyer’s

power is reduced. The net power of the buyers is considered to be moderate (Datamonitor,

2010).

3.6.2.4. Power of Substitutes

The hot drinks consumption patterns of most countries are dictated by culture and

customs. This phenomenon greatly reduces the pressures form substitute products. Some

consumers may opt for caffeine intake from soft drinks or energy drinks, but the sheer number of

coffee and tea drinkers globally will minimize the financial impact on consumers changing to

substitutes. The threat of substitutes is considered to be very weak in this industry (Datamonitor,

2010).


3.2.6.5. Intensity of Rivalry

Rivalry intensification has increased due to the continual introduction of new products

into the market, and moves to differentiate products based on selection, service, and quality

(Gamble & Thompson, Jr., 2011). As the economic downturn affect high-end coffee

establishments and sales growth became consistent but slow, the rivalry further intensified

(Moreno, 2008). Finally, the ability for consumers to switch products and firms with no barrier

has forced the competing companies in the industry to stress brand image and quality to steal

rival’s market share. The intensity of rivalry is very high in the coffee industry.

3.2.7. Summary of Industry Analysis

As a general guideline, the stronger the collective amount of pressure the industry feels

from the five forces, the lower the expected profits will be industry wide (Gamble & Thompson,

Jr., 2011). The coffee industry faces very strong pressures from the intensity of rivals but

relatively weak pressures from the threat of substitute products. The other three forces are

characterized as moderate. Overall, the collective impact of the five forces is moderate. Firms

that operate in the industry efficiently and effectively can make above average profits, but new or

inefficient firms will struggle or be forced out by the five forces.

3.3.0. Competition Analysis

Competition in the coffee industry can be broken down into two different categories,

direct and indirect competition. The direct competition would include firms that manufacture

and product hot drinks (Datamonitor, 2010). These firms will be retailers of ready-to-drink

coffee and tea products, quick service restaurants, and supermarkets. Also, in this category are

the large multinational companies that produce ground coffees and instant coffees (Datamonitor,


2010). The indirect competitors are comprised of energy drinks, caffeinated soft drinks, and

energy shots.

3.3.1. Industry Competitors

Competitive strategy will aim to position rival companies into strategic groups. These

strategic groups consist of industry members that have similar goals and positions in the

competitive industry (Gamble & Thompson, Jr., 2011). These groups are placed on a strategic

group map for analysis on how industry firms are positioned. Firms in the coffee industry will

be mapped based on price and quality of their products versus product line breadth. The size of

the circle representing each firm on the strategic group map is symbolic proportional to the size

of the firm’s share of total group revenues (Gamble & Thompson, Jr., 2011).

The major direct competitors in the coffee industry are listed in the following table. The

firms are broken down by breadth of products offered to the market, industry related sales, and

percentage of sales relative to rivals. The data listed in table 7 are used in constructing the

strategic group map (diagram 4, page 36).

Table 7: Direct Competitors to Starbucks

Firm Product line

Breadth Revenues (2010)

in Millions % of Total Group

Revenues Starbucks High 10,707 27% Dunkin Donuts Moderate 5,500 14% McDonald's Moderate 2,400 6% Green Mountain Coffee Roasters Low 803 2% Kraft Foods, Inc. Low 3,100 8% Nestle S.A. Low 17,700 44%

Source: Harold Brown 2011


Diagram 4: Strategic Group Map of Coffee Industry

Source: Harold Brown 2011

3.3.2. Rivals Anticipated Strategic Moves

Starbucks will focus on strategic moves as outlined previously by expanding into global

locations like China and Russia, utilize cross-platform marketing with companies in the Indian

Hotel market to increase brand awareness, and further incorporate new technology into customer

experience.

One of Starbuck’s stiffest rivals is Dunkin Donuts. Following in Starbuck’s footsteps,

Dunkin Donuts will look to expand globally, especially in the Asian markets. Dunkin Donuts

has set a goal of 100 locations in 10 years in Shanghai alone. The expansion will also include

Price/Quality of P

High

Low

Product Line Breadth

Few Products Many Products

Starbucks

Nestle Kraft McD’s

Dunkin Donuts

Green Mountain


parts of the United States that have yet to become saturated with Dunkin Donuts yet. Many of

the older stores will be getting face lifts to incorporate a new design theme that will enable better

use of new, advanced equipment and technology to enhance the customer experience (Dunkin

Donuts, 2011)

McDonald’s will continue its 2009 strategy of competing against Starbucks through

expansion of McCafe locations into more stores both domestically and internationally.

McDonald’s has a cost advantage over Starbucks in the sense that they can go into existing

McDonald’s for one-third of the price that it would cost Starbucks to open a new location (Liu,

2009). McDonald’s will also need to counter the new aggressiveness of Dunkin Donuts, which

shares a similar market position based on product offerings and price. One way McDonald’s

could improve their strategic position would be to sell their coffee prepackaged in stores and

supermarkets. Both Starbucks and Dunkin Donuts offer this option, as do large food

conglomerates like Kraft and Nestle. This is currently the subject of a Facebook campaign

(Facebook, 2011)

3.3.3. Summary of Competitive Analysis

The main question to answer here is whether the coffee industry offers good prospects for

attractive profits. The industry will not offer the same attractiveness for all competing firms and

the analysis will be focused on one firm (Gamble & Thompson, Jr., 2011). For the purposes of

this paper the firm to focus on will be Starbucks. The above sections have answered the major

points in addressing this question. The coffee industry is in a slow growth phase which will

intensify competitive pressures. Competition will continue to grow stronger as firms look to


expand globally to discover new markets and new customers, develop new products to bring to

market to satisfy consumer demand, and further differentiate products and quality.

The determinant driving forces of the coffee industry all play favorably well to Starbucks.

Starbucks has long sought out global markets and continues to expand each year. Also,

Starbucks utilizes technology extremely well as evidenced by their heavy use of internet

capabilities, social network marketing, Starbucks rechargeable payment cards, and even new

mobile apps to speed ease and ability of payment and ordering. Starbucks is also an industry

leader in both product innovation and product offerings. Most other firms take a follower

position and simply copy successful Starbucks products at lower prices. This positions

Starbucks well in the industry. The strategic group map shows Starbucks as the leader in both

price/quality of product offerings as well as the breadth of products offered. The white space on

the map is possible openings for new firms or areas where existing firms can move into. These

would be a high priced, low breadth offering positions, or a low cost, high breadth offering

position.

3.3.4. Key Success Factors

An industry’s key success factors (KSFs) are those factors that affect industry member’s

ability to successfully compete in the market place. The KSFs are strategy elements, product

features, competitive capabilities, or other intangible assets that deeply affect future success.

These factors are extremely important to all firms in the industry and failure to devote proper

attention will increase the risk of a firms exit from the industry (Gamble & Thompson, Jr., 2011).

The coffee industry faces six common KSFs (as displayed in diagram 5, page 39) that are

applicable to the success of each competing firm (Gamble & Thompson, Jr., 2011).


Diagram 5: Key Success Factors for Survival in the Coffee Industry


As previously discussed in prior sections, product innovation, breadth of product line,

brand power, and the ability to put product into convenient locations for the consumers are the

key success factors for the coffee industry. The firms that can do these KSFs well will compete

at the highest level and have an advantage over all other firms in the industry.

4.0.0. Internal Analysis

The internal analysis is where the strategic analysis changes from an evaluation of the

coffee industry as a whole (external analysis) to a focused evaluation specifically aimed at

Starbucks and their organization. The internal analysis evaluates Starbuck’s collection of

• Internet use for marketing • Mobile communication apps Technology KSFs

• Quality control know how • Customer service ability Service KSFs

• Strong network of distributors/suppliers • Internet and retail store sales capabilities Distribution KSFs

• Breadth of product line • Well known and respected brand name Marketing KSFs

• Product innovation capabilities • Courteous, personilized customer service

Skills and Capability KSFs

• Convenient locations • Ability to capture new market segments Other KSFs


valuable resources and capabilities, its cost position in relation to rival firms, and its competitive

strength in the market (Gamble & Thompson, Jr., 2011). The internal analysis of Starbucks will

consist of an organizational analysis utilizing a modified 7S framework, an analysis of

Starbuck’s resources, a financial analysis of Starbuck’s financial performance, and a SWOT

analysis of Starbucks.

4.1.0. Organizational Analysis

The primary purpose of organizational analysis is to analyze the current state of the entire

organization’s operational and structural framework (uslegal.com, 2011). For the purpose of this

report, the McKinsey 7S framework model will be modified to cover six elements instead of

seven. This type of framework modeling is one of the most common methods to conduct an

organizational analysis. The McKinsey 7S was developed in the early 1980s by Tom Peters and

Robert Waterman, and the basic premise of the model is that there are seven internal aspects of

an organization that need to be in sync with each other if success is to be reached

(www.mindtools.com, 2011).

The six internal aspects involved with the organizational analysis of Starbucks are the

corporate mission, the products and services, leadership, organizational culture, structure, and

strategy. The framework can best be used to determine how to implement a chosen strategy

since this organizational analysis serves to answer the question of “where is the company

going?” (www.mindtools.com, 2011). The visual representation of the Starbucks framework

consists of six interconnected elements. The organizational culture element is in the center of the

framework because this is the central culture and values of Starbucks and why the company was

founded. All other elements rely on the organizational culture for definition


(www.mindtools.com, 2011). Diagram 6 on page 41 is a model of the full organizational

analysis framework of Starbucks.

Diagram 6: Organizational Analysis Framework Model of Starbucks


4.1.1. Corporate Mission

The corporate mission of Starbucks, along with their vision statement and business model

reside are key factors in determining where Starbucks wants to go as an organization (Gamble &

Thompson, Jr., 2011). The corporate mission statement of Starbucks is based on their present

business scope and purpose, unlike the vision statement which outlays the future strategic course,

and answers for the public who they are, what they do, and why they do it (Gamble &

Thompson, Jr., 2011).

Organizational Culture

Strategy

Corporate Missionure

Products and

Services Leadership

Structure


The Starbucks mission statement is concise and clear and does a good job of answering

who they are, what they do, and why they do it. The Starbucks mission statement is:

“Our mission: to inspire and nurture the human spirit – one person, one cup and

one neighborhood at a time.” - (www.starbucks.com, 2011)

Starbucks achieves to deliver on their mission through execution of five core principles: Our

Coffee, Our Partners, Our Customers, Our Stores, Our Neighborhood, and Our Shareholders

(www.starbucks.com, 2011)

The Our Coffee principle refers to how strongly Starbucks feels about the quality of

coffee that they serve their customers. This is a two-sided equation that involves not only quality

to the end consumer, but also to purchase the coffee beans in an ethical manner that will improve

the lives of the farmers that grow them (www.starbucks.com, 2011). The Our Partners principle

refers to how important Starbucks views their employees as a critical resource and asset to its

operations. By treating the employees as partners both the company and employees win

(www.starbucks.com, 2011). The Our Customers principle is made possible by the Our Partners

principle. Starbucks is guaranteeing a perfect cup of coffee to their customers, which can only

be delivered by willing engagement of the staff (www.starbucks.com, 2011).

The Our Stores principle seeks to establish the Starbucks third place experience where

the customers will feel a human connection and a sense of belonging (www.starbucks.com,

2011). The third place experience is how Starbucks attempts to establish itself as the “third

place” that its customers enjoy coffee and also come to relax in a gratifying environment (Rice,

2009). The Our Neighborhood principle sets the tone for Starbucks to act as a world leader and

set the standard and be a good neighbor and act in a positive manner (www.starbucks.com,


2011). Starbucks utilizes the Our Shareholder principle to hold itself accountable to enrich the

lives of everyone that it touches (www.starbucks.com, 2011). This is based on the Stakeholder

Theory that explains that organizations are not just responsible to the shareholders of the firm,

but to all of the groups that it interacts with, like employees, customers, suppliers, investors, and

governments (Freeman, 1984)

4.1.2. Products and Services

The products and services that Starbucks offers is critically important to Starbucks

achieving differentiation in the market by way of constant product innovation (Kelly, 2006).

Starbucks currently offers more than just high quality gourmet coffee. Other products that

Starbucks offers are ready-to drink cold beverages, food items, and retail merchandise

(Starbucks, 2011).

The primary focus of Starbucks is still high quality gourmet coffee and tea products.

These products include espresso drinks, brewed coffee drinks, blended coffee with ice drinks

(Frappuccino), and Tazo tea drinks (Starbucks, 2011). Images 1 through 4 on pages 43 and 44

illustrate Starbucks coffees, Frappuccino, and tea offerings.

Image 1 Image 2


Image 3 Image 4

Starbucks now offers multiple ready-to-drink cold beverages like the espresso Double

Shot, bottled Frappuccino, and bottled coffee. Images 5 through 6 on page 45 depict these

Starbucks product offerings (Starbucks, 2011). These products are sold at Starbucks locations as

well as outside retailers like grocery stores, convenience stores, and concession counters.

Starbucks has also been successful in putting their own brand of ground coffee inside the big box

retail grocers. This coffee is bagged as ground or in whole bean form for the consumers that will

brew their own coffee at home or at work (Starbucks, 2011). The grocers now carry the VIA

ready brew product as well. VIA ready brew is instant coffee that just needs hot water added to

be able to enjoy the same renowned Starbucks taste virtually anywhere (Starbucks, 2010).

Images 7 through 9 on page 45 display the grocery coffee offerings from Starbucks.


Image 5 Image 6

Image 7 Image 8 Image 9

Starbucks offers a wide range of food products as well as just the beverage service.

These food items are breakfast sandwiches and oatmeal, lunch sandwiches, and sweets. These

Sweets are a variety of cakes, cookies, and cupcakes (Starbucks, 2011). Images 10 through 15

on page 46 show a sample of the food items that Starbucks offers.


Image 10 Image 11

Image 12 Image 13

Image 14 Image 15


The primary service that Starbucks offers is its customer service to its customer base.

Starbucks prides itself on its customer service and is dedicated to ensuring that each customer

enjoys each trip to Starbucks (Starbucks, 2011). Starbucks lists customer service as a key

principle in its corporate mission statement (www.starbucks.com, 2011). This service is

paramount and as such, Starbucks recruits and hires high quality workers that fit into their

corporate culture. The staff is considered partners in the organization based on how critical their

job is to fulfilling exceptional customer service and allowing Starbucks to deliver its promise of

quality coffee in its mission statement (www.starbucks.com, 2011).

Other services that Starbucks offer are third place experience atmosphere and onsite

coffee service. The third place experience is what Starbucks refers to as the third location that

consumers will relax and enjoy drinking coffee beverages (Rice, 2009). This is accomplished by

expert location selection, warm and inviting décor, comfortable resting areas, and friendly

customer service (Rice, 2009). Starbucks also offers free Wi-Fi to everyone at its store locations

to entice customers to stay longer and work or surf the web while they enjoy their products

(Starbucks, 2011). Starbucks also offers companies the option of having brewed coffee service

in their break rooms (Starbucks, 2011). This allows employees the option of staying on site to

increase productivity by not having to leave to get their coffee.

4.1.3. Leadership

Leadership is defined by using a three prong test that requires the authoritative position or

office of a leader, the capacity of the individual to lead, and the actual act of leading (Merriam-

Webster, 2011). The undeniable leader of Starbucks is Howard Schultz, who after an eight year

hiatus returned to the CEO position and Chairman of the Board at Starbucks. Starbucks was


experiencing an economic downturn and underperforming financially. Schultz came back into

the picture to save Starbucks and guide it back to a successful path (Stacy Finz, 2011). Schultz

would shoulder most of the blame for the downturn since he insisted on personal accountability

as a fundamental leadership value (Caliendo, 2010). Schultz would close down over 600

locations, invest in retraining each barista, and change business plans (Stacy Finz, 2011). Under

Schultz’s leadership Starbucks rebounded and began showing positive increases and trends in its

financial performance.

The leader of any organization is tasked with not only forming strategy but also with

execution. As CEO and chairman, Schultz is in charge of making sure that Starbucks has a good

strategic plan, staying on top of what is happening, and using pressure and corrective actions to

achieve performance (Gamble & Thompson, Jr., 2011). Although Schultz maintains the

positions of Chief Executive Officer, President, and Chairman of Starbucks Corporation, he is

not alone in the leadership of the company. Other key executives are Cliff Burrows who is the

President of Starbucks Coffee U.S., John Culver who is President of Starbucks Coffee

International, Arthur Rubinfeld who is President of Global Development, Annie Young-Scrivner

who is the Chief Marketing Officer, and Troy Alstead who is the Chief Financial Officer and

Chief Administrative Officer (Starbucks, 2011).

In the author’s opinion, Starbucks may have a talented team of executives, but they failed

to properly plan a strategy that fit Starbuck’s situation. The rapid expansion strategy, combined

with failure to adequately adapt to the economic downturn placed Starbucks in a perilous

position, one in which drove Schultz out of his pseudo retirement to retake the leadership mantle

(Associated Press, 2008). Schultz was able to turn the company back around with calculated

strategic moves, but the team as a whole must be viewed as a weakness. Without Schultz and his


leadership capabilities, Starbucks may have turned into a disaster. It does not appear that there is

a feasible succession plan in place at the moment and the future of Starbucks rest in the capable

hands of Howard Schultz. Overall this is a dangerous position to occupy; one Apple knows all

too well, that as goes Schultz goes Starbucks.

4.1.4. Organizational Culture

A firm’s organizational culture is both unique to the company and at the same time of

critical intrinsic importance for the firm to be able to deliver and execute its chosen strategy.

Organizational culture is defined as a company’s internal work climate that is shaped by the core

values, beliefs, business principles, traditions, work practices, and operating style (Gamble &

Thompson, Jr., 2011). The culture of the company influences how the company conducts

business and makes decisions and in a simpler viewpoint is the makeup of the firm’s

organizational DNA (Reid & Hubbell, 2005).

Organizational culture can be divided into three broad categories: unhealthy, high-

performance, and adaptive. Unhealthy corporate culture has one or more counterproductive

traits that negatively impact the work climate and company performance (Kotter & Heskett,

1992). High-performance cultures are dominated by positive traits where a “can-do” attitude

prevails in a results driven environment (Gamble & Thompson, Jr., 2011).

Starbucks has an adaptive corporate culture with positive traits of internal

entrepreneurship, supportive managers and employees at all levels, and a proactive approach to

identify issues, evaluate options, and implement workable solutions quickly (Gamble &

Thompson, Jr., 2011). This is important to Starbucks because the rivalry among competing

sellers in the market has intensified with the economic recession and super-saturated U.S. coffee


market (Datamonitor, 2010). Starbucks is a leader in the coffee industry due to its ability to

differentiate through product innovation. This places the competition in an inferior position as

follower and lower cost provider. Starbucks succeeds because of its adaptive culture.

4.1.5. Structure

There are two main types of organizational structure that most business falls under. The

first is a departmental organizational structure which is appropriate for most single line of

business firms. The second is a divisional organizational structure, also referred to as

geographical organizational structure, that is adopted by diversified companies (Gamble &

Thompson, Jr., 2011). Starbucks utilizes a divisional organizational structure, meaning that it

employs dedicated people, using dedicated machines, in dedicated markets. Case in point,

Starbucks has a president of its coffee division for both the U.S. market and for the international

market (Starbucks, 2011).

The other key facet of Starbuck’s organizational structure is that they decentralize

decision making. This means that Starbucks pushes down decision making to the lowest

organizational level capable of making a timely, informed, competent decision (Gamble &

Thompson, Jr., 2011). The danger of decentralized decision making is that the company must

maintain adequate control over the actions of employees so that the business is not put in risk.

Starbucks is able to maintain this control by treating employees as partners and making sure that

they are treated well and taken care of (www.starbucks.com, 2011).


4.1.6. Strategy

A company’s competitive strategy deals exclusively with the specifics of management’s

game plan for competing successfully through efforts to make customers happy, offensive and

defensive moves to counter rivals maneuvers, its responses to prevailing market conditions, and

its approach to securing a competitive advantage over rivals (Gamble & Thompson, Jr., 2011).

There are considered to be five generic competitive strategies that firms can utilize to achieve

their competitive strategies which are illustrated on diagram 7.

Diagram 7: Five Generic Competitive Strategies


The low-cost provider strategies entail a firm to strive to utilize lower overall costs to

attract consumers and underprice rivals while a differentiation strategy requires firms to offer

unique or valuable attributes in its products to entice consumers to choose their brand (Gamble &

Thompson, Jr., 2011). The distinction between broad and focused strategy centers on how large

or narrow the market niche of the firm intends to be in choosing target demographic segments.

Overall Low-Cost Provider Strategy Broad Differentiation Strategy

Focused Low-Cost Provider Strategy

Focused Differentiation Strategy

Best Cost Provider Strategy


The best-cost provider strategy is hybrid approach that utilizes product differentiation while

maintaining a low cost position (Wyld, 2010).

Of the five generic competitive strategies, Starbucks uses the broad differentiation

strategy. This strategy allows for Starbucks to not focus on position in the market due to cost

structure or segmentation, but due to consumer preference by way of product innovation and

brand power (Grant, 2009). This allows Starbucks to reach as many potential consumers as

possible with a wide range of product mix.

4.1.7. Summary of Organizational Analysis

The organizational analysis aims to answer the question “where are we going” as an

organization by evaluating key characteristics of the organization: corporate mission, products

and services, leadership, organizational culture, structure, and strategy. The answer “where are

we going” is based on how the firm sets itself up for strategy execution by leveraging the

strength built into its organization. The quality of a company is judged by the symbiotic fit

between its strategy and organizational structure, yet consideration is also placed on whether the

firm’s strategy and structure meet the demands of the external environment (Hannan, 2011). As

the speed of technological change continues to grow faster and faster, and many firms seek to

operate across diverse global environments, the symbiotic fit between strategy and structure

become more difficult to achieve (Hannan, 2011).










Diagram 8 shows the major components of strategy execution needed for Starbucks to

implement and execute its strategy. These components tie directly into how Starbucks must

implement and execute its broad differentiation based strategy (Gamble & Thompson, Jr., 2011).

Since there is no exact combination of strategy executing components, these six major

components are specific to Starbucks and its chosen strategy (Gamble & Thompson, Jr., 2011).

Diagram 8: The Six Components of Strategy Execution for Starbucks


Action Agenda for

Implementing and Executing

Strategy

Build an organization capable of successful strategy

execution

Allowcate ample resources to

critical activities

Institute policies and procedures

that facilite strategy

execution

Install systems that enable company

personnel to carry out

strategic roles

Instilling corporate culture

that promotes good strategy

execution

Exerting strong leadership to

drive executution


The first component is building an organization capable of executing strategy which is

accomplished staffing the organization and structuring the organization and work effort (Gamble

& Thompson, Jr., 2011). Starbucks is able to hire the right people and, because of the high

degree of staff competence, can push down decision making to lower levels with its

decentralized leadership style (Kiviat, 2006).

The second component is allocation of resources to strategy critical activities means that

Starbucks must identify and obtain funding and assets needed to implement and execute strategic

initiatives (Gamble & Thompson, Jr., 2011). Starbucks has the strength financial with a healthy

surplus of free cash flow to fund its initiatives (Starbucks Corp, 2010). The other side of the

equation is in the monitoring of allocated resources to evaluate which underperforming activities

require a withdrawal of resources for the company to redistribute. Starbucks took this approach

in 2008 as it closed over 600 retail stores, 5% of its locations, in an effort to boost financial

performance (The Seattle Times, 2008).

The third component is instituting strategy-supportive policies and procedures that

facilitate strategy execution by providing guidance on how to do certain activities, enforce

needed consistency, and promote an environment that encourages good strategy execution

(Gamble & Thompson, Jr., 2011). At Starbucks, consistency in every brewed cup of coffee is of

extreme importance and no other firm can match this capability (Cuozzo, 2008). Consistent

coffee brewing and service enforces the Starbucks mission statement by allowing for excellent

service and quality of product.

The fourth component is installing information and operational systems that allow for

Starbucks to communicate information throughout the organization to increase quality of


decisions and efficiency in value-chain activities (Gamble & Thompson, Jr., 2011). Starbucks

relies on frontline employees and consumers to drive product innovation, which further enhances

brand power (My Starbucks Idea, 2011). Starbucks’ information systems allow for this level of

idea sharing and feedback. Also, the Starbucks operating system allows for Starbucks to recruit,

train, and places the right employees in the right fitting locations and positions, which in turn

drives service and reinforces the corporate mission and culture (Starbucks, 2011).

The fifth component is instilling corporate culture that promotes superior strategy

execution. The company’s culture is important because it directs the firm’s actions and

approaches to doing business (Gamble & Thompson, Jr., 2011). Starbucks has a positive highly

adaptive culture which allows for it to stay in a leadership position in the industry.

The sixth component is the leadership of the strategy-execution process which requires

senior managers to be diligent and adept at finding problems and issues, learning what obstacles

are in the way, and then clearing the way for superior strategy execution (Gamble & Thompson,

Jr., 2011). Until Howard Schultz returned as CEO in 2008, it has been argued that the leadership

of Starbucks failed to execute the right strategy, and even that Starbucks had “lost its soul”

(Williams, 2007). Starbucks is now on the right road to superior strategy execution with Schultz

back at the leadership position of the organization.

4.1.8. Analysis of Firm Resources

The analysis of a firm’s resources seeks to answer the question “what are the company’s

competitively important resources and capabilities” (Gamble & Thompson, Jr., 2011). The firm

resources analysis is composed of four elements. These elements are the tangible resources,

intangible resources, capabilities, and core competencies and sustainable advantage. Many


companies pursue a resource-based strategy which attempts to exploit company resources in a

manner that offers value to customers in ways rivals are unable to match (Gamble & Thompson,

Jr., 2011).

4.1.8.1. Tangible Resources

Tangible resources are defined as any tangible good that helps the company operate, such

as property or rent, machinery used in production, supplies for the final product, transportation,

and overhead such as internet or electricity (Thornton, 2011). Starbucks possesses physical

assets including retail location and warehouse property, coffee roasting facilities and

machineries, inventory, brewing machines, and transportation equipment. All of these tangible

assets are critical for Starbucks to perform its operations. Starbucks also maintains a large

amount of cash and cash equivalents on its balance sheet (GlobalData, 2010).

4.1.8.2. Intangible Resources

Intangible resources are intangible assets that the company possesses such as brand

image, goodwill or patents, or any intellectual property that the company can exploit to generate

revenues or aid in achieving operational and financial objectives (Thornton, 2011). Starbucks

capitalizes on intangible resources like brand power and image as a high quality provider to

attain objectives. Starbucks also utilizes its immense human capital and expertise in product

innovation, location selection, and marketing ability to stand out as the premier coffee brand.

4.1.8.3. Capabilities

Management needs to consider competitive capabilities when crafting strategy. These

types of capabilities include skills and specialized expertise, valuable physical assets, valuable


human assets, and competitively valuable alliances (Gamble & Thompson, Jr., 2011). Planning

strategy around company capabilities helps to ensure a better fitting strategy to the company’s

situation and gives a better chance for successful implementation (Gamble & Thompson, Jr.,

2011).

Starbucks has a skill set in creating and introducing innovative products in to the market.

These skills give Starbucks a competitive capability since they are able to position themselves as

innovation leaders, and not copycat followers, and thus build brand power, differentiate

themselves further from rivals, and improve financial performance. Starbucks can then use the

free cash flow physical assets from its financial performance to fund and drive strategic

initiatives. Without these physical assets, Starbucks would not be able to aggressively expand in

the market or have funding to further product research and development.

Starbucks can also count their collective human assets and intellectual capital as a

competitive capability. The financial trends show that Starbucks is a better performing company

with Howard Schultz leading the firm (Datamonitor, 2010). Starbucks also has a quality team of

product designers, marketers, real estate agents, and strategy crafters that enable Starbucks to

operate in the effective and efficient manner that they do.

4.1.8.4. Core Competencies and Sustainable Advantages

Core competencies are defined as a proficiently performed internal activity that is central

to a firm’s strategy and competitiveness (Gamble & Thompson, Jr., 2011). The core competency

is an activity that the firm performs better than other internal activities and leads to sustainable

advantages. To be a sustainable advantage, the core competency must be hard to imitate or copy

by rivals (Gamble & Thompson, Jr., 2011).


For Starbucks, its core competency is knowledge-based and resides in the intellectual

capital of the management of the company, most notably Howard Schultz, accessed over years of

defining and leading the industry. Starbucks stands out as a leader based on how it operates and

is consistently able to produce new and innovative products that consumers desire. The

innovation drives revenues and is not easy to match by rivals either because of capital funding

required or lack of expertise. Starbucks essentially created the gourmet coffee house scene in

America and has remained the leader ever since (Thompson, Jr. & Strickland, 1999).

4.1.8.5. Summary of Firms Resources

Starbucks is able to utilize both its tangible assets and intangible assets to create core

competencies and competitive capabilities which have led to sustainable advantages in the

industry. This has been done primarily with human capital and expertise which has fueled

revenue growth for new strategic initiatives.

4.2.0. Financial Analysis

The financial analysis of Starbucks will consist of five segments: the valuation analysis,

growth analysis, profitability analysis, financial strength analysis, and management efficiency

analysis. Each segment of the financial analysis of Starbucks will utilize key ratios of financial

performance to evaluate and identify trends in performance.

4.2.1. Valuation Analysis

For the valuation analysis, leverage ratios and other important measures of financial

performance will be evaluated. Valuation analysis looks to answer the question “what is

something worth” and is done to evaluate the potential merits of an investment or to objectively


assess the value of a business (investopedia, 2011). Table 8 lists the leverage ratios and other

financial measures used to evaluate the valuation of Starbucks.

Table 8: Valuation Analysis of Starbucks

Source: OneSource Information Services, Inc., 2011

The price-earnings ratio is calculated by dividing the current price by the diluted earnings

per share from continued operations (OneSource, 2011). A p-e ratio above 20 indicates strong

investor confidence in a firm’s outlook and earnings growth (Gamble & Thompson, Jr., 2011).

Starbucks has a p-e ratio of 25.34 which indicates strong investor confidence and growth in the

future of Starbucks. The price per sales ratio is the current price divided by sales per share.

Starbucks has a solid 2.41 sales per share ratio (OneSource, 2011). The market cap value is

calculated by multiplying the current share price by the number of outstanding shares in the

market and is used to quantify the size of a firm; in this case the market cap value of Starbucks is

$27 billion dollars.

4.2.2. Growth Analysis

The growth analysis looks to evaluate the trends in areas like revenues, operating income,

and assets to establish trends of growth or retraction. The growth analysis for Starbucks utilizes

the current year end numbers and compares them to 1-year, -year, and 5-year figures for trend

evaluation. Table 9 on page 60 shows the growth ratios for Starbucks.

Market Valuation USD (mil)Price-Earnings Ratio 25.34Price/Sales 2.41Market Cap 27,005


Table 9: Growth Analysis Ratios for Starbucks Annual 1 Year 3 Year 5 Year Year End Growth Growth Growth

3-Oct-10 Total Revenue 10,707.40 9.54% 4.39% 10.95% Operating Income 1,419.40 152.56% 10.43% 12.71% Basic EPS Excl Extraord Items 1.27 140.13% 12.29% 15.20% Cash from Operating Activities 1,704.90 22.74% 8.60% 13.06% Free Cash Flow 1,264.20 34.00% 71.44% 35.22% Total Assets 6,385.90 14.51% 6.12% 12.69% Total Liabilities 2,711.20 7.12% -3.95% 13.75% Total Long Term Debt 549.4 0.02% -0.04% 186.02%

Source: OneSource Information Service, 2011

The key growth ratios are total revenue, operating income, and free cash flow. Total

revenue represents all revenue from the company’s operating activities, or day-to-day business

activities, with a higher number being typically better (OneSource, 2011). The revenue has

grown during the five year period with a drop in the three year point. This is when Howard

Schultz returned as CEO and the one-year growth is now on par with the five-year growth after a

50% drop in the three-year period.

Operating income is essentially the amount of money left over after summing the total

revenue with the total operating expenses (OneSource, 2011). The higher the number here the

better, and after a dip in the three-year growth, Schultz boosted the one-year growth to a very

high 152% increase. The free cash flow refers to how much money that Starbucks has, free and

clear of any obligations, to fund capital expenditures, acquisitions, or new strategic initiatives

(Gamble & Thompson, Jr., 2011). The three-year period growth was the highest at 71%, but this

is largely due to Schultz coming back as CEO and shedding underperforming stores and their

respective liabilities. Still, having over $1.2 billion in free cash flow is a very strong position for

Starbucks to occupy and gives them ample funding for new strategic initiatives.


4.2.3. Profitability Analysis

The profitability analysis focuses on the profitability ratios. These ratios are utilized to

show the different margins that Starbucks is achieving based on the sales versus the expenses

that it incurs. The main margin ratios are the gross margin, the operating margin, and the net

profit margin. Table 10 shows the profitability margins for Starbucks for the last five years for

comparison. For each of the margins listed in the table, the higher the percentage the better.

This means that Starbucks is retaining more per dollar sold and less is spent on operating costs

and expenses. All of the trends are moving upward after slowdowns caused percentage drops in

2008 and 2009 before Schultz returned Starbucks to the desired profitability track.

Table 10: Profitability Ratio Analysis for Starbucks

3-Oct-10 27-Sep-09 28-Sep-08 30-Sep-07 1-Oct-06 Profitability Ratios

Gross Margin 25.19% 20.71% 19.19% 23.34% 24.66% Operating Margin 13.26% 5.75% 4.85% 11.20% 11.48% Pretax Margin 13.42% 5.73% 4.39% 11.22% 11.64% Net Profit Margin 8.83% 4.00% 3.04% 7.15% 7.47%

Source: OneSource Information Services, 2011

4.2.4. Financial Strength Analysis

To measure the financial strength of Starbucks, five financial objectives are evaluated.

The five financial objectives to be evaluated are five year trends in total revenue, annual

increases in earnings per share, percent returns on shareholder equity, bond and credit ratings,

and internal cash flows (OneSource, 2011). The total revenue trends and internal cash flow

position has been analyzed as part of the growth analysis in section 4.2.2 of this report.


The annual increase in earnings per share (EPS) can be viewed in table XX on page XX.

The EPS growth took a slight dip during the three-year period, but EPS increased greatly at the

one-year point with a 140% increase. This shows that Starbucks is back on track for earnings

after the economic downturn and CEO change. The credit rating of Starbucks has also

rebounded over the past few years. In 2010 the S&P upgraded Starbucks from a BBB rating to a

BBB+ rating (Brian, 2010). In 2011 Morningstar further upgraded Starbucks to an A- rating,

much of which was based on debt reduction and financial performance improvement

(Morningstar Corporate Credit Rating, 2010).

Each of the criteria used to evaluate the financial strength of Starbucks show positive

trends from total revenue increases to improved credit ratings. These positive trends indicate

that Starbucks is in a strong financial position. Starbucks has grown both total current assets and

total assets each of the last five years while simultaneously reducing both total current liabilities

and total liabilities. This leads to a strong balance sheet for Starbucks that has grown stronger

ach of the last five years. Table 11 is a representation of the Starbucks balance sheet for the last

five years.

Table 11: Starbucks Balance Sheet

03-Oct-

2010 27-Sep-

2009 28-Sep-

2008 30-Sep-

2007 01-Oct-

2006

UpdateType/Date

Updated Normal 03-Oct-

2010

Updated Normal 27-Sep-

2009


2008


2007

Updated Normal 01-Oct-

2006 Filed Currency USD USD USD USD USD Exchange Rate 1 1 1 1 1

Auditor Deloitte &

Touche LLP

Deloitte & Touche

LLP

Deloitte & Touche

LLP

Deloitte & Touche

LLP

Deloitte & Touche

LLP

Auditor Opinion Unqualified Unqualified Unqualified Unqualified with

Unqualified with


Explanation Explanation Cash & Equivalents 1,164.0 599.8 269.8 281.3 312.6 Short Term Investments 285.7 66.3 52.5 157.4 141.0 Cash and Short Term Investments 1,449.7 666.1 322.3 438.7 453.6 Accounts Receivable - Trade, Gross 306.0 276.0 334.0 291.1 228.1 Provision for Doubtful Accounts -3.3 -5.0 -4.5 -3.2 -3.8 Trade Accounts Receivable – Net 302.7 271.0 329.5 287.9 224.3 Total Receivables, Net 302.7 271.0 329.5 287.9 224.3 Inventories - Finished Goods 95.1 76.7 89.6 88.6 80.2 Inventories - Raw Materials 238.3 381.6 377.7 339.4 328.1 Inventories – Other 209.9 206.6 225.5 263.6 228.0 Total Inventory 543.3 664.9 692.8 691.7 636.2 Prepaid Expenses 156.5 147.2 169.2 148.8 126.9 Deferred Income Tax - Current Asset 304.2 286.6 234.2 129.5 88.8 Other Current Assets, Total 304.2 286.6 234.2 129.5 88.8 Total Current Assets 2,756.4 2,035.8 1,748.0 1,696.5 1,529.8 Buildings 3,701.3 3,580.5 3,580.8 3,264.9 2,545.6 Land/Improvements 58.0 58.2 59.1 56.2 32.4 Machinery/Equipment 1,955.8 1,943.0 1,783.8 1,770.2 1,504.7 Construction in Progress 173.6 119.2 293.6 215.3 175.0 Property/Plant/Equipment – Gross 5,888.7 5,700.9 5,717.3 5,306.6 4,257.7 Accumulated Depreciation -3,472.2 -3,164.5 -2,760.9 -2,416.1 -1,969.8 Property/Plant/Equipment – Net 2,416.5 2,536.4 2,956.4 2,890.4 2,287.9 Goodwill, Net 262.4 259.1 266.5 215.6 161.5 Intangibles – Gross 79.6 75.8 72.5 - - Accumulated Intangible Amortization -8.8 -7.6 -5.9 - - Intangibles, Net 70.8 68.2 66.6 42.0 38.0 LT Investment - Affiliate Companies 341.5 352.3 302.6 258.8 219.1 LT Investments – Other 191.8 71.2 71.4 21.0 5.8 Long Term Investments 533.3 423.5 374.0 279.9 224.9 Other Long Term Assets 346.5 253.8 261.1 219.4 186.9 Other Long Term Assets, Total 346.5 253.8 261.1 219.4 186.9 Total Assets 6,385.9 5,576.8 5,672.6 5,343.9 4,428.9 Accounts Payable 282.6 267.1 324.9 390.8 340.9 Accrued Expenses 836.0 642.9 554.1 664.3 568.0 Notes Payable/Short Term Debt 0.0 0.0 713.0 710.2 700.0 Current Portion - Long Term Debt/Capital Leases - 0.2 0.7 0.8 0.8

Customer Advances 414.1 388.7 368.4 296.9 231.9 Income Taxes Payable 100.2 127.8 76.1 92.5 94.0 Other Current Liabilities 146.2 154.3 152.5 - -


Other Current liabilities, Total 660.5 670.8 597.0 389.4 325.9 Total Current Liabilities 1,779.1 1,581.0 2,189.7 2,155.6 1,935.6 Long Term Debt 549.4 549.3 549.6 550.1 2.0 Total Long Term Debt 549.4 549.3 549.6 550.1 2.0 Total Debt 549.4 549.5 1,263.3 1,261.1 702.7 Minority Interest 7.6 11.2 18.3 17.3 10.7 Reserves 47.7 43.4 44.6 43.7 34.3 Other Long Term Liabilities 327.4 346.2 379.5 293.2 217.8 Other Liabilities, Total 375.1 389.6 424.1 336.8 252.1 Total Liabilities 2,711.2 2,531.1 3,181.7 3,059.8 2,200.4 Common Stock 0.7 0.7 0.7 0.7 0.8 Common Stock 0.7 0.7 0.7 0.7 0.8 Additional Paid-In Capital 145.6 186.4 39.4 39.4 39.4 Retained Earnings (Accumulated Deficit) 3,471.2 2,793.2 2,402.4 2,189.4 2,151.1 Other Comprehensive Income 57.2 65.4 48.4 54.6 37.3 Other Equity, Total 57.2 65.4 48.4 54.6 37.3 Total Equity 3,674.7 3,045.7 2,490.9 2,284.1 2,228.5 Total Liabilities & Shareholders’ Equity 6,385.9 5,576.8 5,672.6 5,343.9 4,428.9 Source: OneSource Information Services, 2011

4.2.5. Management Efficiency Analysis

The management efficiency analysis looks to answer the other side of the balanced score

card, the strategic side, where the financial strength analysis answers the financial objective side

of the balanced scorecard. The strategic objectives side of the balanced scorecard addresses

questions regarding whether Starbucks is meeting the strategy that it has set in place. Items like

whether Starbucks is retaining the desired number of customers, introducing the desired number

of new products into the market, or achieving customer satisfaction rates that it deems

appropriate (Gamble & Thompson, Jr., 2011).


4.2.6. Summary of Financial Analysis

Starbucks has been able to weather the economic downturn of 2008, partly due to the

general economy improving and largely due to the return of Howard Schultz as CEO, and has

begun increasing performance across the board in terms of financial ratio trends (Finz, 2011).

With trends across the board improving on a yearly basis, investor confidence in the performance

of Starbucks, and a strong balance sheet, the continued financial strength growth of Starbucks

should continue unabated.

5.0.0. SWOT Analysis

SWOT analysis is a powerful, albeit simple, tool for evaluating a firm’s resource

strengths, its competitive deficiencies, the opportunities that exist in the market, and the external

threats to the organization’s future well-being (Gamble & Thompson, Jr., 2011). SWOT stands

for Strength, Weakness, Opportunities, and Threats and is represented in a graphical format

utilizing a 4 by matrix (Marketingteacher.com, 2011). The strengths and weaknesses of the firm

come from an internal origin, while the opportunities and threats are based in the firm’s external

competitive environment (Datamonitor, 2010). Diagram 9 on page 66 shows the SWOT matrix

for Starbucks.


Diagram 9: SWOT Matrix for Starbucks


5.1.0. Strengths

The strengths of Starbucks come from an internal origin and are designated as helpful to

Starbucks reaching its target objectives. Starbucks must leverage these strengths to overcome

their weaknesses and realize potential opportunities. Starbucks maintains a wide product and

brand offerings to its consumer base. This is what leads to Starbucks brand strength, which is

considered to be the core strength of the company (Datamonitor, 2010). Starbucks has a

reputation globally as the brand that offers the highest quality of coffee along with a superior

customer service experience (Datamonitor, 2010).

Starbucks also maintains strengths in its store operations and its sound financial

performance. Starbucks sells its products through retail stores and licensed locations which

allow for strong financial performance. With the 17,000 plus retail locations, Starbucks has been


able to expand its retail business and increase the market share, which has led to an increase in

financial performance (GlobalData, 2010).

5.2.0. Weaknesses

Weaknesses for Starbucks in the SWOT analysis are also from an internal origin and are

categorized as operational areas and activities that reduce Starbucks being able to achieve

strategy execution. The first weakness for Starbucks is with their overdependence on the U.S.

market for revenues (GlobalData, 2010). The majority of Starbucks’s locations are in the U.S.

market, which has allowed for brand dominance but slowed per store revenue increases as rival

firms have also aggressively expanded within the U.S. market (www.businessteacher.org, 2011).

This has led to the raise of the second of Starbuck’s weaknesses, a decline in market

shares (GlobalData, 2010). The company's compounded annual growth rate (CAGR) for

revenue was 11.3% during 2005-2009, which is below the S&P 500 companies average of

12.74%. A lower than S&P 500 companies average revenue CAGR implies that the company has

underperformed the average S&P 500 companies growth and lost market share over the last four

years (GlobalData, 2010).

Starbucks has also had several product recalls and one class action lawsuit levied against

it in recent years. Both of these instances weaken consumer trust and significantly erode brand

power (Datamonitor, 2010). The most recent product recalls were for a coffee grinder with a

laceration hazard potential (Allison, 2009) and glass water bottles that had the potential to shatter

and cause lacerations (Starbucks, 2010).


5.3.0. Opportunities

For Starbucks to overcome its internal weaknesses of an oversaturated U.S. market and

declining market share, they must leverage their strengths of brand power and financial

performance and seek out external opportunities. These opportunities are areas that Starbucks

has a chance to move in to bolster expansion and revenues (Datamonitor, 2010). The primary

opportunity for Starbucks is in the emerging economies of China, Russia, and Brazil

(GlobalData, 2010). Starbucks can also utilize strategic growth initiatives with licensing and

cross-promotion and cross-branding with other firms to increase marketability and brand

awareness with new consumers (Starbucks, 2011).

Another opportunity for Starbucks is in further evolving and positioning its retail

locations with the third place experience (Datamonitor, 2010). The third place experience refers

to how Starbucks envisions itself as the third location, aside from home and work, where

consumers enjoy coffee (Starbucks, 2011). The third place experience allows for the customer to

stay longer onsite at the retail location and consume more products and services from Starbucks,

therefore driving sales.

5.4.0. Threats

Threats are areas of concern in the external environment that can affect how Starbucks,

and the coffee industry as a whole, will do business. Industry wide the completion is very

intense and unless Starbucks can expand outside of the saturated U.S. market and find new

consumers, then market share may continue to drop (Datamonitor, 2010). Government

regulation also looms as a possible threat as an increase in regulation by the governments of

either importing or exporting countries will have a ripple effect throughout the coffee industry.


Lastly, if the supply of high quality Arabica coffee beans diminishes or is changed, the costs of

acquiring the supply by the retailers will increase and could alter the competitive landscape

(Datamonitor, 2010).

6.0.0. Recommendations

The third question to answer in the strategic management that all firms need to answer

are “how are we going to get there” (Gamble & Thompson, Jr., 2011). This centers on the

strategic initiatives that Starbucks should undertake in an effort to improve sales and market

position. Two recommendations will be given, the first will answer what Starbucks needs to do

the respond to market and competitive forces in the external environment, and the second

recommendation will answer what Starbucks needs to do to utilize their collective internal

strengths to overcome their internal weaknesses to realize present opportunities.

6.1.0. Recommendation 1 (External)

The first recommendation will focus on the external environmental analysis conducted in

the first half of this research paper. Three of the external environment analysis components

influencing the coffee industry are themselves influenced by product innovation. These

components are the coffee industry driving forces, the coffee industry key success factors for

survival, and the strategic group map of Starbucks and its strategic group.

The driving forces of the coffee industry, as discussed in section 3.1.8., are the primary

agents of change that affect how firms in the industry strategize and operate (Gamble &

Thompson, Jr., 2011). One of the determinant driving forces in the coffee industry that acts as a

positive influence is product innovation. The industry must continuously strive to innovate new


product offerings for two reasons: to continue to attract new customers that do not buy from the

current product mix and to offer differentiated products from rival firms. The industry needs to

listen to its customer base as they are one half of the product innovation equation. The customers

know what they want and will sound off by making current items popular and successful or by

giving in-store or online feedback as to what products and services they would like.

Product innovation also surfaces in the analysis of the key success factors of the coffee

industry in section 3.3.4. Key success factors are threshold competencies for firms operating in

the coffee industry, meaning that firms which cannot perform these key functions should not

choose to become a player in the industry as they will not be able to survive. Product innovation

serves as a key success factor for survival in the industry since product innovation is the primary

means to differentiate firms from rivals. It is through differentiation that firms can build brand

power, customer loyalty, and earn above average profits.

With the analysis of the strategic group map in section 3.3.2, Starbucks enjoys white

space in its immediate vicinity. The white space represents areas of opportunities for rivals to

move into. The horizontal axis is based on breadth of product line and rivals will have to

increase product offerings, as well as real or perceived quality of product in relation to

Starbucks, in order to move closer to Starbucks on the strategic group map and fill the white

space. To do this, rivals will need to bring new products to market instead of playing the copycat

role and simply mimicking Starbucks.

Starbucks has two primary weaknesses according to the SWOT analysis in section 5.2.0.

They are an overdependence in the saturated U.S. coffee market, and a declining market share in

the U.S. operations. Starbucks will need to continue to produce new and innovative products in


order to overcome these weaknesses. Product innovation will reinforce brand image and result

in a more brand power to attract new consumers and retain existing clientele. Furthermore,

bringing new products to market will also open new customer demographics for Starbucks to

draw upon from the existing base of coffee and tea drinkers.

6.2.0. Recommendation 2 (Internal)

The second recommendation is based on the internal analysis of Starbucks as an

organization. The recommendation is for Starbucks to further expand globally into emerging

markets utilizing a franchising strategy. Global expansion into emerging markets is one

opportunity that exists for Starbucks. With the saturated domestic market, Starbucks needs to

locate new markets with new customer bases in order to continue to grow as a company.

Starbucks will need to utilize its strong financial performance, namely free cash flow, to fund

this expansion plan without requiring new debt to be raised.

Franchising into China, India, Russia, and Brazil can be financially rewarding for

Starbucks. New and emerging markets are notoriously slow in growing revenues for entering

firms, but by implementing a franchising strategy Starbucks will use the franchisees as the

primary means to recruit and grow market share and establish brand power. As the leader in the

coffee industry, Starbucks will be able to charge premium franchise fees. These fees will allow

Starbucks to generate additional revenue streams, maintain control of their marks and brand

through franchise agreements, and have the option to convert franchise stores to corporate stores

if quality suffers.

One essential part of the franchise strategy must be for Starbucks to engage a think local,

act local mentality as they grow into these new emerging markets. A think local, act local


mentality will give Starbucks the mindset to be able to adapt to the local wants and needs of the

direct market that they are serving (Gamble & Thompson, Jr., 2011). A think global, act global

or think global, act local mentality will not be sufficient.

Conclusion

In conclusion, although Starbucks may have started from the humble beginnings of three

friends that liked high quality, premium roasted coffee it has since turned into a leader in the

coffee industry. This is due largely through the efforts and vision of Howard Schultz. His

success and leadership of the industry has been compared to what Ray Kroc did to McDonald’s

and the fast food industry. Today Starbucks serves as a model that many other successful rivals

try to emulate or improve on. Starbucks is powered by their continual product innovation,

customer service aptitude, ability to expand globally, and successfully select locations.

Coffee and/or tea are consumed globally by most of the population. This coupled with

the forces that drive change in the industry result in a net positive force that makes the industry

attractive to businesses. An analysis utilizing Porter’s five-forces model outlining competitive

pressures will show that the coffee industry is able to provide for attractive profits by firms in the

industry. The overall competitive pressures are moderate and firms can be successful but they

will have to be efficient and effective in the strategies that they undertake or they risk being

removed from the industry by consumers.

Starbucks enjoys a favorable position in the strategic group that it is in. Starbucks has a

high priced, high quality product with a wide breadth of product offerings. They are the only

firm in this position. Most other firms offer moderate or few product offerings at a lower price

point. Starbucks has been able to build its brand image and market power while in this position


which has yielded annual profits. As Starbucks is in the strategic group position of power, the

expected moves of rivals are all designed to keep up with Starbucks. No firms have been able to

successfully produce new products that meet market demand in as convenient locations as

Starbucks has been able to offer.

Starbucks also enjoys critical know how and experience in the key success factors that

the coffee industry demands of successful firms. Starbucks keenly utilizes technology to

enhance customer experience, selects convenient locations, innovates products that are in

demand and profitable, and continually looks to conquer new markets and market share ahead of

rivals.









Starbucks is able to leverage its resources, tangible and intangible, to create competitive

capabilities and core competencies that allow for strategy execution. Starbucks achieves this by

utilizing its human capital and expertise to constantly strive for excellence in product innovation.

Furthermore, Starbucks is able to internally fund strategic initiatives from free cash flow

produced from sound financial performance. Starbucks’s financial ratios have increased over the


last three years due partially to a recovered general economy and partially to the return of

Howard Schultz to the leadership position in the company. These financial ratio increases have

positioned Starbucks in a greater financial situation.

The SWOT analysis of Starbucks reveals that the strength of Starbucks lies within their

strong financial performance based on their retail store operations. The weakness of Starbucks is

an over reliance on a saturated U.S. market with a declining market share as a result from

intensified rivalry in the marketplace. This weakness can be overcome by utilizing Starbucks’s

strong finances to realize the present opportunities to expand into emerging markets.

To realize the present opportunities Starbucks will need to implement and execute two

critical objectives. The first is to continue to be an industry leader in product innovation. This

will serve to further differentiate Starbucks from rivals and will also open new customer bases

for the new products. The second objective will be to expand globally into emerging economic

markets using a franchising approach. Starbucks will be able to create revenue streams via

franchise fees while the markets mature and retail revenues increase. By implementing both of

these strategic objectives Starbucks will continue to be the leader in the coffee industry and

further enhance its brand power and market position.


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