Starbucks a case study

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CASE STUDY: STARBUCKS COFFEE

BY: KATHLEEN LEE

GRC 411


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CASE STUDY: STARBUCKS

KATHLEEN LEE

1

Brie History:

Te rst Starbucks location opened in 1971. Te name is inspired by Moby Dicks rst mate.

Tis name and the mermaid logo were inspired by the love o the sea, rom Starbucks original lo-cation in Seattle Washington in the heart o Pike Place Market. Starting as a single shop special-

izing in high quality coee and brewing products the company grew to be the largest roaster in

Washington with multiple locations until the early 80s. In 1981, current CEO Howard Schultz,

recognized a great opportunity and began working with the ounder Jerry Baldwin. Aer a trip

to Italy to nd new products, Schultz realized an opportunity to bring the ca community en-

vironment he ound in Italy to the United states and the Starbucks brand we know today began

to take orm. Selling espresso by the cup was the rst test. Schultz le Baldwin to open his own

Italian coee house Il Giornale which ound outrageous success and in 1987 when Starbucks

decided to sell the original 6 locations, Schultz raised the money with investors and purchased

the company and used them with his Italian bistro locations. Te company experienced rapid

growth going public in 1992, and growing tenold by 1997, with locations around the United

States, Japan and Singapore. Starbucks also began expanding its brand. According to George

Garza in his article Te history o Starbucks the ollowing product lines were added:

Oering Starbucks coee on United Airlines fights.

Selling premium teas through Starbucks own azo ea Company.

Using the Internet to oer people the option to purchase Starbucks coee online.

Distributing whole bean and ground coee to supermarkets.

Producing premium coee ice cream with Dreyers.

Selling CDs in Starbucks retail stores.Starbucks uses minimal advertising and has grown on word o mouth and brand recognition.

According to Garza by 2004 Starbucks had reached 1,344 locations.

(Garza)


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Updated history and Current Status

oday, according to the Starbucks website, they have 16,706 stores (as o Dec. 27, 2009) in 50

countries. In 2009 they made strives socially as they opened the Farmer Support Center in Ki-

gali, Rwanda and became the worlds largest buyer o Fair rade CertiedM coee.

Teir mission statement rom the company prole is as ollows:

Our mission is to inspire and nurture the human spirit one person, one cup, and one

neighborhood at a time.

Teir core competencies can be dened as high quality coee and products at accessible loca-

tions and aordable prices, provided a community to share in the coee drinking experience,

and variety o choices. Te also value ethics and good business practices and are a leader being

voted one o 2010s most ethical businesses by Ethisphere magazine or the 4th year running.

(Starbucks)

Starbucks is acing its own struggles however as it saw sales start slipping beore other com-

panies did in the recent recession. According to Melissa Allison in her article Starbucks has a

new growth strategy more revenue with lower costs, Starbucks has closed 900 stores and

eliminated 34,000 jobs. Starbucks new strategy is to reocus on some o the areas that decrease

risk and up ront investment. Tis includes expanding oreign stores, with aid o partnerships

that share risk and costs, selling VIA instant coee and other products in retail and convenience

stores, and reinvigorating the Seattles Best Brand coee.

A statement rom CFO roy Alstead this March paints this picture:We clearly hit a wall and didnt do very well in the 2007/2008 time period. From here

orward, when we grow Via, Seattles Best Coee and consumer products, theres less

investment or each dollar o revenue.


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Tis new strategy has inspired some optimistic eedback. Morningstar investment research rm

has increased estimate o Starbucks shares rom $4 a share to $24 aer the statement o revamp-

ing the brand.

Morningstar analyst had this to say R.J. Hottovy.:

Im surprised it wasnt ramped up in earlier years. Product innovations and internation-

al expansion not only make the business potentially more protable, but deend them

against competition.

International partnerships increase challenges but also create new ideas in new markets that can

then be translated back to US markets. (Allison)

Introduction Growth Maturity Decline

Starbucks Lifecycle

Starbucks in a mature stage o its liescycle. It was ounded over 20 years ago and it has expe-

rienced rapid growth in the last 2 decades. However within the last ew years its growth hasslowed and has even had to close locations. Tey are now ocusing eorts on previous endeavors

and international expansion.


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Value Chain

Bean and

ingredient

Selection

Product

Development

Product

Distribution StorefrontTake-home

products

Te above is the value chain or Starbucks. Te upstream portion o the value chain shows the

product development rom adding teas and international infuences, to the research that took

place to develop the VIA instant coee line. Tey also search the globe or Fair rade suppliers

o high quality beans. Tese products are then distributed to corporate storeronts, ranchise

locations, airport terminals, grocery stores and more, and nally oer ground coee and gicards to take home.

New Value Chain

Bean and

ingredient

Selection

Product

DevelopmentProduct

Distribution

Storefront Take-home

products

International

Development

Online Storefront

customizationMobile Apps

Te above is a new value chain with international development added upstream to allow or in-

ternational markets to develop new products that better suit there cultures that could potential

add value to the US market as well such as the Green ea Latte developed in Japans Starbucks.

Added downstream is Online Storeront customization, that would allow you to create a prole

online, order online, create new drinks etc. Also added is a mobile app that could locate star-

bucks locations, put in drink orders etc.


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Above is the Boston Matrix. It shows the cash cows as the regular Starbucks line o Coees,

Lattes and Frappacinos ound at nearly every location. Tese are stable products that account

or the bulk o sales. A potential star is the International locations, which hold less nancial risk

and open doors or innovation and stability. Question marks are the recently added VIA instant

coee to be expanding to grocery stores and convenient stores. Current products like this such

as the dog, pre-bottle rappacinos account or a tiny raction o sales. Another question mark

is the o orgotten sub-brand Seattles Best. Te company will be revamping this brand and its

uture is unknown.

Te ollowing is Porters Generic Competitive strategy. Shown is Starbucks as a whole in the

dierentiation strategy as they provide a high quality coee and unique experience in theconvenience o a large volume o locations, which separates them rom their competition. VIA,

the new instant coee line is straddling dierentiation and low cost- leadership. While it will

be a low cost and convenient alternative to Starbucks regular coee, it is still unique rom other

products in the market. Te in-store gis and brewing utensils are in the ocused dierentia-


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tion category as they cater to the coee lover, and are unique items ound only in the Starbucks

stores.

Competetive Advantage

Lower Cost Dierentiation

Cost Leadership Dierentiation

Cost Focus Focused Dierentiation

Starbucks

VIA

In-Store brewing

products/gifts

Below are the nancial ratios rom the income statement and balance sheets or Starbucks:

Current Acid DebttoEquityGrossProt NetMargin

2009 1.29 0.86 0.83 56% 0.19

2008 0.8 0.49 1.28 20% 0.15

2007 0.79 0.47 1.34 24% 0.3

Te ratios show that assets vs. liabilities has increased which is promising aer the risky pursuit

o expanding to 30,000 has since been abandoned. Te acid ratio also refects this. Debt to

equity has decreased which also shows stability. Gross prot has shown a large increase which

is very good in a mature company. Teir net margin in 2009 was very promising and is nearly a

sustainable competitive advantage.


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SWO AnalysisInternalFactorAnalysisSummary(IFAS)

InternalStrategicforces Weight Rating WeightedScore Comments

Strengths

S1-BrandIdentityS2-QualityS3-VarietyS4-LocationsS5-ConvenienceS6-StoreAmbianceS7-Ethics

20%

10%

10%

10%

20%

5%

5%

4

3

3

5

4

3

3

.8

.3

.3

.5

.8

.15

.15

S1-thecompanyconsistently

maintainsitsbrand,evenwithoutheavy

marketing.

S2-Theysearchforqualitybeans

worldwide.

S3-Theyofferdrinkvarietyand

customization.

S4-locationsareeverywhereasoneof

thecompanysmaingoals.

S5- with new products live VIA,

drivethruwindows,instorelocations

convenienceisimportant.

S6-ambiancewasafoundationofthe

starbucks brand and continues in its

locations.S7-byusingfairtradeingredientsthey

arealeaderinethics.Weaknesses

W1-OverexposureW2-ToomanyproductsW3-Riskyinvestmentinmorelocations

10%

5%

5%

4

4

4

.025

.0125

.0125

W1-Starbucksgoaltohave30,000

locationsstalledintherecent

recessions.Bybecomingoverexposed

theyrisklosingtheuniquequalitythey

werefoundedon.

W2-Byconstantlyaddingproducts,

someproductshavelostvalue,Seattles

Bestforexample,andtheyarerisky

endeavors.

W3expandinglocationsintheUS,is

ahighriskandcostlyinvestmentin

comparisontointernationalexpansion.

TOTALSCORES 1.00 3.05

ExternalFactorAnalysisSummary(EFAS)

ExternalStrategicforces Weight Rating WeightedScore CommentsStrengths-Opportunities

O1-CustomizationO2-InternationalMarketsO3-On-the-GoLifestyle

O6-Partnerships

10%

15%

20%

10%

4

5

5

3

.4

.75

1

.3

O1-StarbucksintroducedacompletelycustomfrappacinoinCanada.O2-Increasingeffortsinternationally,toincrease

stability.O3-VIAinstantcoffeeandotherproductstobeingroceriesandconveniencestores.O3PartneringwithmorelocationsincludingNYSE.


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Weaknesses-Threats

T1-DirectCompetitionT2-CheaperAlternativesT3-Recession

15%

15%

15%

3

2

4

.45

.3

.6

T1-DirectcompetitionfromPeetsandCoffeeBeanincreasing.LackofmarketingT2-CheaperalternativesfromMcDonaldsandDunkinDonutsT3-Recessionhasaffected

customerswillingnesstospend,greaterrisksininvestmentTOTALSCORES 1.00 3.8

StrategicFactors Weight Rating WeightedScore S I L CommentsS1-BrandIdentityS5-ConvenienceW1-OverexposureO1-CustomizationO2-InternationalMarketsO3-On-the-GoLifestyleT1-DirectCompetitionT2-CheaperAlternatives

20%

20%

5%

10%

15%

15%

5%

10%

5

4

3

3

4

4

2

2

1

.8

.15

.3

.6

.6

.1

.2

S

S

I

I

I

LL

L

Brand Identity is extremelyimportant to the company andis a long term factor for thecompany.Convenience is also one of thefoundations that the companygrew on and will continue tomaintaintheiradvantage.

International Markets offerlower risk investment andinnovationopportunities.Cheaper Alternatives likeMcDonalds threaten theconveniencefactor.

TotalScore 1.00 3.9

StrategicFactorAnalysisSummary(SFAS)

Te strategic actors summary shows that the most important actors overall received a score o

3.9 which is above average. Tis is positive or the company. Tey are responding well to their

strength, weaknesses, opportunities and threats. Aer some recent re purposing it is clear that

the company is ocusing on its core competencies but has room to improve.


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Analysis o Key Issues acing the rm

Te key issues acing this rm was its attempts at massive expansion and creating new value

innovation. Te need to expand could cause the company to become over exposed and risk its

ability to change. New players in the eld such as McDonalds pose a new potential threat ocompetition, though it is unclear i they share the same market.

Above are Porters 6 Forces and their level o threat to Starbucks. Te bargaining power o sup-

pliers is high because o the natural resources needed to create their ingredients and Starbucks

believes in nding air-trade and high quality beans, oen rom other countries Tese speci-

cations limit the number o suppliers. Te threat o new entrants is medium in that the coeemarket is changing. Te need or ambiance and a place to share is losing edge to the on-the-go

alternatives, and should a new entrant come along with a dierent business model there is

room or threat. However Starbucks is the household name. Industry competitors is on the rise

because o McDonalds creating the McCae line. Peets has increased presence as well. Treat o


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substitutes is low, because coee is always going to be a desired drink and pastime o choice.

Alternative Action

Tere are alternative actions Starbucks can take to secure its competitive advantage it has upheld

or so long. Below is the current value curve or Starbucks and its most relevant competitors

Peets, and the McCae Line.

McDonalds shows a similar curve but lower in all levels. Te one item that truly separates the

two is the reputation Starbucks has in the coee industry unlike McDonalds. Te rest is similar,

which shows a threat to Starbucks becoming part o a red ocean. Peets has an opposing curve,

which could be a threat but their lack o volume, and brand recognition limits them rom com-

petition.

My suggestions or the Four Action rame work would be to create more customization by al-

lowing users to create new favors and drinks above and beyond the options they have now. Tis

would incorporate with the other creation o online user experience. Users could go on to the


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online Starbucks interace and have complete control to create their own drink, order online,

nd the nearest Starbucks and receive directions. Users could post their avorite drink combina-

tion and others could vote on it. Also involved in user experience could be mobile apps, putting

in drink orders, nder etc. to enhance the Starbucks brand in the new digital era and to create ablue ocean or the coee experience.


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Conclusion

Overall Starbucks has maintained a competitive advantage since creating its original blue ocean

o bringing quality, bistro-style coee choices to the masses. In order to stay current it will needto ocus on its core competencies and avoid spreading themselves to thin. o avoid competitors

such as McDonalds and other coee chains, they will need to create new value innovation by

enhancing the customer experience by investing in online content and interactivity. Rather than

creating more new products, I think their strength lies in their brand and by enhancing the con-

nection to their loyal customers, they will separate themselves rom McDonalds and others.


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WORKS CIED

Garza, George. Te history o Starbucks. Catalogs.com. Catalogs.com, n.d. Web. 7 Jun 2010.

.

Our Heritage. Starbucks. Starbucks, 2010. Web. 7 Jun 2010. .

Allison, Michelle. Starbucks has a new growth strategy more revenue with lower costs.

Seattle imes. Seattle imes, 15 May 2010. Web. 7 Jun 2010. .

Starbucks a case study

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