Final Starbucks2 Pdf_2

PLANET STARBUCKS (A) ‘Group B’

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TABLE OF CONTENTS

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CONTENTS PAGE Background

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Problem Identification 7

Main Issue 7

Narrow SWOT analysis 8

Functional Area Analysis 16

Alternatives 47

Recommendation 53

Implementation 57


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BACKGROUND

About Starbucks:

Starbucks is one of the finest coffee stores, popular among its customers for its aura with a very

comfortable atmosphere to relax and the first rate music it plays. As in the 1990s, it is a store

which has been almost everywhere throughout the United States and Canada.

Starbucks was founded in Seattle by Gerald Baldwin, Gordon Bowker, and ZievSiegl in 1971. It

started its operations as a gourmet coffee bean roaster and distributor. Howard Schultz joined the

company as a member of their marketing team in 1982 and urged the partners to consider

opening an Espresso bar alongside selling coffee. The company opened its first Espresso bar at

its Seattle store. However, the partners didn‘t want to take the idea of expanding its Espresso bar

line forward, as to them it resembled stepping into the fast-food business instead of focusing on

their own business of roasting and distributing.

In 1985, Howard Schultz opened Il Giornale after he left Starbucks. Il Giornale was an espresso

bar that sold coffee and assorted coffee beverages made exclusively with Starbucks‘ beans. Two

years later, Schultz bought the former Seattle Starbucks company, six stores and roasting plant,

for $3.8 million. Schultz now was in control of Starbucks and with new investors, began building

a global business which reached sales of $3.3 billion in 2002 and was acclaimed one of the top

100 growing global brands.

Now Howard Schultz had every opportunity to implement his dream concept of taking the Italian

espresso bar to ever corner of the world through Starbucks. By fall 2002, the company was

specializing in three sectors --- assorting and roasting, selling coffee, selling Frappuccino

globally through other retailers.

Though Starbucks made up a relatively small percentage of the coffee industry in North

America, it had successfully been able to re-energize the entire coffee industry. The Starbucks

Effect was a term that stood for every excellence in the coffee industry not only in terms of

selling products of premium quality but also in terms of the delivery methods. Starbucks did

more for its customers than just providing them with good, differentiated coffee, it also made its


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customers familiar to products they were not accustomed to, thus winning their loyalty through a

sense of discovery.

Product and Service:

Starbucks even worked meticulously on creating a differentiated atmosphere for its customers to

give them the Starbucks Experience. And for this it had to go far beyond just being a coffee

house or a coffee brand. The employees made sure that they keep their customers engaged with

their various services like special deliveries, special pastries and selected music to create warmth

and comfort. They made their customers feel that they were not at home, not at work but at a

third place.

The maintenance and development of this quality experience required a strong organizational

commitment which was facilitated by Howard Behar who joined the company as the director of

store operations in 1989. Behar refocused much of the Starbucks development away from the

pure product itself—coffee, to the consumer‘s experience in a Starbucks. To make sure that the

employees continuously pay attention to keep the customers engaged, highly extensive trainings

were carried out to keep the employees motivated. But this involved a lot of investment which

goes worthless if the employees are not retained. One of the biggest barriers to retention was

compensation and benefits, in which the service industry was notoriously deficient. Starbuck‘s

solution to this was to come up with health care benefits and stock ownership plans for the

employees.

In 1990, Orin Smith joined the company as Chief Financial Officer who focused his

development efforts within Starbucks on the organizational processes which would support

effective execution of strategies. Thus while Behar had focused on people, Smith believed in

strict organizational discipline.

Howard Schultz continued to add key leaders in the business in the early 1990s—people who

would continue to fill out the gaps in the organization and solidify a corporate culture which was

a difficult balance between entrepreneurship and disciplined growth.

Supply Chain:

The supply chain for coffee was highly fragmented and so, Starbucks wished to improve the

quality and integrity of its coffee by working back up the supply chain to the actual growers.

Thus the company managed to take some of its cost out of the supply chain.


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As Starbucks moved into the market, it focused on its location. Stores were located in corner

positions for consumer recognition and access. There were actually many stores of Starbucks in

the same area and hence Starbucks was everywhere people looked. The strategy helped in its

acknowledgement; however, revenue earned per store was falling.

Expansion including International Market:

To deter the entry of new entrants, the company practiced aggressive property negotiations and

paid premiums over existing rental prices to push up the per square feet price. By the mid-1990s,

Starbucks had stores in more than 40 states and was starting to look to the limitations of market

saturation.

Starbucks operated internationally with a motive to respect the culture and the traditions of the

countries where they do business. Thus they defied many of their critics who argued that

Starbucks‘ premium prices, paper cups, and smoke-free cafes would not fit within traditional

cultural practices in places like Tokyo and Vienna.

In 1988, Starbucks first opened its store outside the United States in Vancouver, British

Columbia. However, Starbucks‘ true international expansion had begun in Japan in October 1995

with the formation of a joint venture with Sazaby, a Japanese retailer and distributor with its own

chain of Afternoon Tea stores. Sazaby proved to be an excellent partner, with expertise in both

retail beverages and real estate. By 2002, they had more than 250 stores nationwide, and

projected more than 500 stores by 2003. Although average Japanese store sizes were half that of

the United States, they averaged nearly twice the sales.

With the opening of its first store in January 1999 in the World Trade Centre in Beijing, China,

Starbucks added the People‘s Republic of China to its growing list. In the next three-and-a-half

years, it had expanded to 35 shops, focused in and about Beijing and Shanghai. The reception to

Starbucks in a culture grounded in tea was remarkably successful. Although Starbucks was

heavily criticized for opening an outlet in a souvenir shop in Beijing‘s Forbidden City in 2001,

the shop flourished.

The company‘s entry into Continental Europe had been anticipated for years, but with much

trepidation. Europe‘s longstanding traditions of coffee consumption and independently owned

and operated coffeehouses constituted an established market which was not considered open to

American entry. Starting in Switzerland and Austria in 2001, the company then expanded into

Spain, Germany, and Greece in 2002. Although many critics argued—as they had in Japan


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before—that local customers would not be attracted to smoke-free, paper-cup coffee

consumption, the lines had been long.

Each country of entry was evaluated in detail, including focus groups, quantitative market

assessment, and detailed identification of appropriate business partners. As part of the expansion

process, Starbucks brought all foreign managers to its Seattle offices for a rigorous 13-week

training course in the Starbucks experience. By the end of 2002 Starbucks had 1,312 of its total

5,886 stores outside of the United States. The current plan was to open two international stores

for every one new domestic store.

The need for recognition in terms of having a socially responsible image is becoming popular

and Starbucks doesn‘t lag behind in this sector. Starbucks conducts business in ways that

produce social, environmental and economic benefits to the communities where they operate.

This tags Starbucks as having corporate social responsibility. As a result, consumers are not only

getting their favorite products from Starbucks but also the feeling of being attached to a company

with strong values.

Starbucks operates as a uniquely defined brand in many countries respecting individual cultures

and is thus not confined within a single traditional entity. However it deals with only one

commodity, which is coffee and the price of its raw materials is determined in the international

market. As coffee prices fell in the late 1990s, Starbucks was criticized for benefitting from low

cost sourcing of raw materials and for not taking into account the economic condition of the

coffee growers.

By 2001, Starbucks had implemented a multitude of programs to pursue its program for

corporate social responsibility and pursue sustainable economic development for the people in its

supply chain by altering business practices in procurement, directly supporting the coffee

growers and forming brands which would provide conduits for consumers wishing to support

their initiatives.

Starbucks preferred to purchase using outright pricing, in which the price was negotiated directly

with small and medium-sized farmers, cutting out the segment of the supply chain which the

wholesalers usually occupied. Thus, a greater proportion of the price went directly to the

producers, assuring a higher return to the small farmer. Starbucks had initiated a number of loan

guarantee programs in 2002 to provide pre-harvest and post-harvest financing for coffee farmers.

Starbucks was a regular and growing giver, supporting relief organizations such as CARE, the

nonprofit international relief organization, as well as providing direct support to farmers and

farm communities around the world. The company was also providing aid in a variety of ways to

the improvement of coffee processing facilities in a number of the countries of origin and


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initiated a few product brand programs which allowed consumers wishing to support these

sustainable development initiatives to express their interest through purchasing at a price.

By the spring of 2003, Starbucks was at what many thought the zenith of its prospects. Starbucks

was one of the few companies to continue rapid sales and earnings growth during that period.

However Starbucks was incurring some problems as well. Service quality and employee

motivation and retention were continuing issues. Store managers and employees were

overworked and underpaid. The industry was becoming saturated and so the limits to remaining

expansion opportunities in North America were now in sight. Falling coffee prices on world

markets in 2001 and 2002 had led to more and more pressure on Starbucks to increase the prices

it paid to growers. As Starbucks moved into more and more countries, labor and real estate

practices came under increasing consideration. Earnings growth was sure to slow. The question

grew as to how far and how fast the company could still proceed.


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Problem Identification Starbucks was facing anti-globalist movement because of rapid global expansion

strategy.

Starbucks was criticized as a ubiquitous band i.e. high visibility with enormous

stores.

Conflict in higher management between CFO and Director of store operation.

Starbucks’s massive expansion strategy leaded to cannibalize their existing

individual stores sales.

The operating cost was very higher because of the enormous number of store.

The Stock value was going down from 2000 to 2002 that hampers the shareholders

interest.

The strategy of Starbucks of being wholly owned operation incurs high fixed cost.

Starbucks was criticized as Cultural Imperialized because of rapid aggressive

expansion policy.

The service quality and employee motivation and employee were decreasing over

time.

Some employees were underpaid and Starbucks was sued for that.

ISSUE

How could Starbucks increase their sales with keeping their mission intact and ensure consumer

satisfaction?


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CORE ANALYSIS: SWOT Strengths:

Starbucks is a ubiquitous brand.

Starbucks operates in 28 countries with nearly 5700 stores. Thus it has a familiarity all

over the world. Being a ubiquitous brand, Starbucks can easily cover up for any fall in

profits it incurs in one country through the revenue earned from other countries.

Starbucks introduced espresso bar.

Starbucks was previously involved only with roasting, distributing and coffee sales but

then with the introduction of espresso bars, it became more profitable since there was

little additional cost associated with this whereas the consumers also had a wider range of

choice.

Starbucks was acclaimed as one of the top 100 growing global brands in 2002.

It had made more than $215 million in profit on $3.29 billion in sales in 2002, and sales

and profits were both expected to grow 25% in 2003. It was the highest growth in the

industry and increased their profitability.

Starbucks re-energized the coffee industry.

The coffee industry was re-energized as Starbucks was continuously coming up with

different ideas to create a Starbucks Effect to differentiate it from regular coffee shops.

Starbucks cared for its customers.

Starbucks cared for its customers‘ satisfaction. The employees made sure that they keep

their customers engaged with their various services like special deliveries, special pastries

and selected music to create warmth and comfort. They made their customers feel that

they were not at home, not at work but at a third place.


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Starbucks had a reduced supply chain.

The supply chain for coffee was highly fragmented and so, Starbucks wished to improve

the quality and integrity of its coffee by working back up the supply chain to the actual

growers. Thus the company managed to take some of its cost out of the supply chain.

Starbucks had good choice of location.

As Starbucks moved into the market, it focused on its location. Stores were located in

corner positions for consumer recognition and access. There were actually many stores of

Starbucks in the same area and hence Starbucks was everywhere people looked. The

strategy helped in its acknowledgement.

Starbucks could deter the entry of competitors.

To deter the entry of new entrants, the company practiced aggressive property

negotiations and paid premiums over existing rental prices to push up the per square feet

price.

Starbucks was respectful of other cultures.

Starbucks operated internationally with a motive to respect the culture and the traditions

of the countries where they do business. Thus they defied many of their critics who

argued that Starbucks‘ premium prices, paper cups, and smoke-free cafes would not fit

within traditional cultural practices in places like Tokyo and Vienna.

Starbucks was involved with corporate social responsibility.

The need for recognition in terms of having a socially responsible image is becoming

popular and Starbucks doesn‘t lag behind in this sector. Starbucks conducts business in

ways that produce social, environmental and economic benefits to the communities where

they operate. This tags Starbucks as having corporate social responsibility. As a result,

consumers are not only getting their favorite products from Starbucks but also the feeling

of being attached to a company with strong values.

Starbucks had low advertising costs.

Starbucks was named by Interbrand one of the most recognizable global brands, although

the company still spent less than $20 million per year in advertising.


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Starbucks has a Good Brand reputation and image.

Starbucks‘ primary strength is its impeccable brand reputation and image. The company

is known to deliver high quality products and customer service. This was critical for their

growth.

Starbucks has a better access to quality raw materials.

Despite its overly priced cup of coffee, brewed using high quality Arabica beans, most of

its customers keep coming back to the store to feel the ―Starbucks experience‖ the

company has promised to its customers. Thus, the price of its coffee is not the issue but

the quality of service the company gives to its customers.

Starbucks has Favorable access to distribution channels.

Apart from its strong brand, Starbucks also have access to high quality resources and raw

materials. Its Arabica beans are derived exclusively from coffee plantations and

percentage of its raw materials are Fair Trade certified. The company also has

advantageous access to distribution channels as its stores and coffee houses are located in

strategic areas. With several stores almost a stone‘s throw away or are literally facing

each other on both sides of the street.


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Weaknesses:

Store managers and employees were overworked and underpaid.

To make sure that customers get the Starbucks Experience, the employees had to

continuously work on keeping their customers pleased and engaged. The industry was

notoriously deficient in terms of compensation and benefits which added to the difficulty

of retaining employees.

Starbucks had to invest a lot to keep the customers happy.

The maintenance and development of this quality experience required a strong

organizational commitment. To make sure that the employees continuously pay attention

to keep the customers engaged, highly extensive trainings were carried out to keep the

employees motivated. But this involved a lot of investment which goes worthless if the

employees are not retained.

The Price of Starbucks coffee was grossly overpriced.

One of the weaknesses of Starbucks is its grossly overpriced coffees. Whilst the company

targets the affluent executives, young and old, as its primary market, the current

economic conditions make the customers become sensitive to prices of commodities and

products. The frequency of customer visits may be reduced due to the current economic

situation. Hence, Starbucks‘ current price strategy may seem to be out of place and needs

to be changed.

Image as a high-end coffeehouse is diminishing.

Apart from the pricing strategy, the Starbucks coffeehouses‘ image as luxurious ―Third

Place‖ seems to be vanishing. With stores literally facing each other, the lush experience

the customers wanted appears to be diminishing. It is increasingly becoming like a fast-

food chain, only the prices of its products are much higher.

Possibility that their innovation falter over time.

Starbucks has a reputation for new product development and creativity. However, they

remain vulnerable to the possibility that their innovation may falter over time.


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It had over dependency on the competitive advantage.

The organization is mainly dependent on their main competitive advantage, the retail of

coffee. This could make them slow to diversify into other sectors should the need arise.

Rather than focus internally it was focusing on expansion.

They basically don‘t have that much focus on their internal factors rather they are

focusing on the expansion more. They try to make this highly visible to the consumer.

But as doing this they are lacking of internal improvement what is demotivating the

customer to attract to their stores. So, internal focus is needed to attract the customers

which are lacking for the Starbucks.


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Opportunities:

Starbucks can expand its international business even further.

The company has a reputation of international success so they can consider entering the

markets of other countries which they have not ventured yet.

Global consumer products segment is doing well

The company can capitalize more on the global consumer products segment whilst

recovering from the other two business segments. The international market is also

showing a good promise for Starbucks. The economies of the emerging markets are

growing at a rapid pace.

International market is showing a good promise

The company can capitalize on this growth by aggressively expanding into these

countries. Using its fundamental strategies indicated in the previous sections and the

recommendations at the end of this paper, the firm can increase its revenue and profit by

penetrating into the emerging markets.

New products can be announced

New products and services that can be retailed in their cafes, such as Fair Trade products

can enhance the sales.

The company has the opportunity to expand its global operations. New markets for coffee

such as India and the Pacific Rim nations are beginning to emerge.

Co-branding with other manufacturers can be a good opportunity.

Affiliation with co-branding with other manufactures of food and drink, and brand

franchising to manufacturers of other goods and services both have potential for the

expansion.

Expansion into retail operations could be a good opportunity.


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As they have very expanded retail chains so they also have the opportunities to expand

into the retail operations. It would help them to attract the customer with the more

diversification in their products.

Technological advances could give an opportunity for innovation.

Technological advancement has a great impact on the sales always. It would help them to

introduce more diversified options to attract customers which will increase their sales as a

result.


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Threats:

The coffee industry was becoming saturated.

The industry was becoming saturated and so there were limits to expansion opportunities

in North America. Growth was expected to slow down in the near future.

Coffee prices fell in the international market.

Falling coffee prices on world markets in 2001 and 2002 had led to more and more

pressure on Starbucks to increase the prices it paid to growers.

Entry of new competitors could be threat for Starbucks.

The entry of two large companies and their fast rise in the specialty coffee presents the

most credible threat to Star bucks‘ dominance. McDonald‘s and Dunkin‘ Donuts are

formidable opponents to Starbucks. These two companies have the capability to match

the Starbucks‘ distribution channels and marketing activities. The two fast-food chains

can equal Starbucks in terms of financial resources. Starbucks still faces the same old

criticisms about its overpriced coffee. Hence, its image is being threatened, especially

now that the economy is not getting better.

Economic crisis may lead to less sales of coffee.

The current global economic crisis also poses a danger to Starbucks. As reflected in the

company‘s financial reports, its revenue and profit are going down due to the bleak

economic condition. The company‘s shares of stocks are also not doing well in the stock

market trading, primarily due to its low income and revenue. The economic crisis is

pounding on the company‘s profitability.

Threat of substitute

The market for coffee is growing and stay in favor with customers but another type of

beverage and drinks could replace coffee in the future.


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FUNCTIONAL ANALYSIS Functional Analysis is an integral part of a case analysis. It enables us to have a very good

analysis of the company, the industry, the competitors it will be dealing with and many other

factors. Porter‘s five forces, life cycle, financial analysis, company‘s HR strategy and country

risk analysis and many other factors are analyzed so that we could have a complete scenario and

take a good decision.

Porter’s Five forces Model:

The Porter‘s Five Forces is a simple but powerful tool for understanding where power lies in a

business situation. This is useful, because it helps you understand both the strength of your

current competitive position, and the strength of a position you‘re looking to move into. With a

clear understanding of where power lies, you can take fair advantage of a situation of strength,

improve a situation of weakness, and avoid taking wrong steps. This makes it an important part

of your planning tool. Conventionally, the tool is used to identify whether new products, services

or business have the potential to be profitable. However it can be very illuminating when used to

understand the balance of power in other situations.

Threats of new Entrants:

For most of the industries in the world the threat of new of new entrants exists. Analyzing this

we have to consider some factors which are described below with the proper use in the case.

Time and cost of Entry:

If anyone looks that any industry is making a sustainable profit they would surely want to enter

the market. But entering into the market is not easy. One of the barriers is the time of entry

means when they are entering the markets. The companies have to see whether it is too late or it

is the right time to get into the industry. In the case the coffee market has become saturated with

many players playing the game. There is also a recession going which is wracking the economy.

For the new entrants considering entering the market the findings is not very satisfactory or

motivating. On the other hand, cost is another issue to be taken into account. Cost of getting into

a industry plays an important role and determine the fact of a firm‘s entrance. It also serves as a

barrier for the new firms to enter. It needs equipments and machineries, plant set up, licensing

etc which might be costly. It might need a huge investment for a company to get in. There is also

less cost associated with the coffee industry for the coffee shops, specialty places etc.


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If we consider international market firms will feel optimistic to enter the new markets because it

has still the potential to provide more .markets in the world. So the early they can enter into the

market, the fast they can get recognition. In the international market the threat of new entrants is

high whereas the USA market has been saturated.

Product Differentiation:

Product differentiation refers to-that that the product of the company is differentiated or not

means the company is providing a different product from the other products in the market or not.

The company‘s product might be differentiated in quality, price, customers‘ specifications etc. It

plays an important role for a new entrant who is considering entry into the market. If the

company‘s product is differentiated it gets difficult for a new company to come and start taking

the market share as the existing product is defined and established in the market. In the case the

product is differentiated. Starbucks has defined themselves for both premium product & service.

They stood not only for good coffee, but especially for the dark –roasted flavor profile that the

founders were passionate about. They offer something so far superior that it takes a while to

develop their palates, and it created a sense of discovery and excitement and loyalty that the

customers feel a bond with them. For a new company who enters into the market have to

establish itself and define itself as a premium brand which will take a long time and it will not be

easy.

Specialist Knowledge:

Specialist knowledge is other important factor that constraints the firm to enter into the market

Firms with special knowledge can enjoy long time freeness from the threats of new comers. The

Starbucks‘ coffee are made exclusively of Starbucks beans and their service is way superior

compared to the other coffee shops. They specially give their employees training on treating

customers and maintaining high standards of service to give the customers highest satisfaction.

This is giving them an advantage over others.

Economies of Scale:

Economies of scale are other important factor that constraint the new comers in entering any

industry. If the firms in the industry have achieved economies of scale in their production it

becomes difficult for the new comers to get into the market. For a new comer it is very difficult

to achieve economies of scale instantly, it takes them a long time to achieve. As they have a lot

of stores flourishing all over they can achieve economies of scale in the overall sales but if we

consider individually it becomes difficult for them to achieve economies of scale. With so many

stores flourishing they were able to achieve economies of scale in the marketing and promoting

cost.

Capital requirements:

For new entrants in an industry, it is important for them to take into account the capital

requirement to establish the business. For many businesses it is high capital requirement that

constrain new firms to enter. The capital requirement in this industry is moderate. Any new firm

having an average amount of capital can enter the business but to sustain in the long run the


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company need to expand and if they want to expand like Starbucks they will need substantial

amount of financing. So to do well and compete with a firm must have strong backup of finance.

Access to distribution channels:

Distribution channel of a country plays an important role for the new entrants to consider It is

not easy for a new firm to get access in the distribution channels. As the new firms are already in

the business they have a access to different channels, for a new firm starting it is difficult to set

up the distribution in order to reach all the customers. For a new firm entering into the market it

will be really difficult for them to get a distribution channel like Starbucks. Starbucks have made

themselves available in everywhere, anywhere you go. Their strategy of being available

everywhere has paid them off. Being available in so many areas in short distances is not easy for

a new firm to do. So the new firms will face difficulty in accessing channels.

Switching cost:

The cost associated for consumers to switch from one product to other is referred to switching

cost. The new entrant should also see if there is any switching cost for the consumers or not. If

there is switching cost for consumers to switch to new products the consumers will barely shift if

they don‘t have any problem with the product. In the case there is no switching cost for

customers, the customers will switch if they get better product or service from any other firm. If

the new firm has something better to offer e.g. better coffee, better taste, better or superior

service the consumers will definitely shift to the newer stores, although it will be a difficult task

for them as Starbucks provides a unique service so far different from other traditional coffee

stores.

Expected Retaliation:

Existing firms retaliate when they are threatened by the new comers. They try to retaliate them

by different policies and sometimes play unethical and unfair games. Starbucks already play

unethical games in real estate by not allowing other competitors to enter in their territory by

paying premiums on real estate prices driving the prices up. For a new firm it will be difficult for

the competitors to enter and start playing the game, Starbucks will definitely retaliate and try to

make the new entrants weak.

Cost Advantages:

Cost advantage is another form of barrier which restricts new entrants. It can be a very important

weapon for a company who enjoys this advantage. Companies with this advantage can drive out

their competitors anytime they want, so the threat for new comers increases if there are firms

having the cost advantage. Starbucks have a cost advantage. They have pulled out all the

middlemen of the supply chain which enable them to enjoy the cost advantage. Any new firm

also have the opportunity to take this advantage because the farmers of coffee are ill paid and if

they pay them well the farmers will become loyal and thus it can minimize their cost.


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Technological Protection:

The technology the firms use may make the firm apart form the others. The firms might have

some technology that it is difficult to achieve for others.. If a firm in the industry have this kind

of technology it will definitely enjoy the power. In the case, not much is talked about the use of

any technology but we can assume that it is not a very high technology oriented industry. So the

risk for the new entrants is minimum. New comers can enter into the industry and try to play the

game with the existing players as there is no company who has the technology to drive others

out.

Government Policy:

High barriers to entry restrict new players to come in the field. These barriers mainly refer the

barriers of the country to be entered. It could be political, legal barriers e.g. it could be tariffs,

quotas, banned, and other restrictive policies taken by government etc. In U.S.A there are no

particular barriers for a new firm to start a coffee store business. Any new entrant can enter into

the business as no barriers are there for them. The U.S.A government has always been supportive

to the new business until it doesn‘t violate the laws and policies of the government.


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Bargaining Power of Suppliers:

Bargaining power of suppliers is another tool for testing the five forces. It allows you to have an

idea about the suppliers, their influence in the industry, number of suppliers in the industry etc.

Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of

suppliers of each key input, the uniqueness of their product or service, their strength and control

over you, the cost of switching from one to another, and so on. The fewer the supplier choices

you have, and the more you need suppliers' help, the more powerful your suppliers are. The

considerations in analyzing the bargaining power of suppliers are:

Number of Suppliers in the industry:

The number of suppliers in the industry decides the power and influence of suppliers. The lower

the number of suppliers the higher the power they can have and consequently number of

suppliers high in numbers means they have less power. In the given case there are not much

given about the number of suppliers, though the analysis there are high number of suppliers who

can have influence on the coffee industry. First of all, there are large number of suppliers which

has driven the price down of coffee and the farmers are not well paid. The suppliers supplying

are also high in numbers that means they don‘t have the bargaining power. There are large

numbers of suppliers. Their strategy of being socially responsible helps them to get the suppliers

in their hands.

Uniqueness of Product:

Uniqueness of product is other dimension of bargaining power of suppliers. If the suppliers are

unique in their product or service they can exercise influence on the companies. In the case, the

suppliers are not unique. The raw materials are easily available. So they don‘t have any power

over them. Starbucks can switch suppliers if they see it is no more feasible to buy materials from

them.

Size of Suppliers:

The size of suppliers is another important factor. It plays a major role in determining whether

who will be influential-the supplier or the buyer. If the supplier is huge enough that it can survive

without you and it doesn‘t affect its business, the supplier will have higher bargaining power. If

the firm you are operating is small compared to the size of your supplier the supplier will be

playing with you in prices, in supplying raw materials etc. In the case, there are no suppliers who

can enjoy such a power. Starbucks has much higher influence in its suppliers because its size is

very big compared to its suppliers and it is playing a major role buying the raw materials from

them. If the firm has the ability to substitute their suppliers the firm can have more power on

their supplier. In this case, Starbucks position itself in sustainable economic initiatives with


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farmers of coffee making them large in size compared to suppliers. Leading players in the market

must maintain product quality if they are to maintain their brand equity in the long term; their

need to source raw materials of appropriate quality boosts the strength of the suppliers that can

offer these.


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Substitutes of Suppliers’ products:

If there are not many substitutes suppliers of products, supplier power will be high. The suppliers

have influence in their customers. In the case Starbucks‘ suppliers have low influence though the

industry has substitutes such as tea leaves, tea etc referring the high power of suppliers.

Switching Cost of Suppliers products:

If there is high switching cost of the suppliers‘ products the supplier power will be high. In the

case, there is no switching cost of suppliers so if any supplier or suppliers play unfair game or

there is conflict in negotiation they can always move to other suppliers.

Threat of forward integration:

Suppliers can become competitors by making the customers‘ products. There is always this

threat. In the case there is no chance of the suppliers becoming a competitor as the farmers are

already poor, they don‘t get well paid for what they are doing. So there is no chance of the

suppliers to become their competitors.

Threats of substitutes:

This is affected by the ability of your customers to find a different way of doing what you do, if

you supply a unique product that produces an important process, people may substitute by doing

the process manually or by outsourcing it .If substitution is easy and substitution is viable, then

this weakens your power.

Substitutes Performance:

If the substitute of the product serves the same utility or a better performance the customers are

more likely to switch that product. The better performance of substitutes could be a threat for the

company producing the product. From the point of view of consumers, there are a number of

substitutes for coffee. These include tea, soft drinks, different types of shakes, energy drinks,

caffeine, milk etc.

Switching Cost: If the customers have no switching cost and the performance of substitutes are

satisfying for the consumers they will definitely switch to substitutes. Customers might be

switching to different substitutes if they provide them with the same utility. As there is o

switching cost the customer might be switching to other products which will provide them the

same utility.

Bargaining power of customers: Here you ask yourself how easy it is for buyers to drive prices

down. Again, this is driven by the number of buyers, the importance of each individual buyer to


23

your business, the cost to them of switching from your products and services to those of someone

else, and so on.

Number of Customers:

The number of customers is influential in bargaining power of buyers. If you deal with few,

powerful buyers they are often able to dictate terms to you. Higher number of buyers means

lower power to them. As the coffee industry has large number of customers they will have lesser

impact on its sellers.

Threat of backward integration:

There is a threat of backward integration as well by the buyers. If buyers see that the industry is

attractive and it can bring profit they might try to enter into the industry and take the market

share.

Undifferentiated products:

If the products are not differentiated the buyers are more likely to shift to any products anytime.

They will be inconsistent in buying the same product. Starbucks have differentiated their

products and service quite strongly (by brand, flavor and superior service and so on) and the fact

that major buyers generally need to offer a wide range of products for their own customers,

should also tend to weaken buyer power.

Buyers ’ability to substitute:

If the buyers can easily substitute to other brands the firm can never win from them. In the coffee

market the buyers are able to substitute to any other brand or product they want. The power of

buyers is high considering this factor. It will be high unless the consumers become brand loyal.

Price sensitivity:

Price sensitive customers tend to change brands more rapidly than the customers who are less

sensitive to prices. The US consumers are not price sensitive rather they are quality sensitive. As

they are price insensitive they have lesser power in their hands to influence the coffee market.


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Rivalry among existing competitors:

Rivalry among competitors depends on some factors such as number of competitors in the

industry, high exit barriers, slow growth industry, high strategic stakes, quality differences and

switching costs.

Number of Competitors:

The important thing here is the number and capability of your competitors – if you have many

competitors, and they offer equally attractive products and services, then you‘ll most likely have

little power in the situation. If suppliers and buyers don‘t get a good deal from you, they‘ll go

elsewhere. On the other hand, if no-one else can do what you do, then you can often have

tremendous strength. Starbucks provide the customers with superior service and premium brands

of coffee which they cannot find in any other coffee store. It has taken them to a new world of

coffee stores, it has changed the means the coffee store for them making them feel the store as a

third place. This has brought them a strong position in the market.

High Exit Barriers:

High exit barriers make an industry more competitive as once a company entering into the

market will not exit easily because high costs are associated if they shut down. It is notable that

there don‘t exist high exit barriers for firms. We have seen that earlier Starbucks was divested by

the original partners because they wanted to cash out from their company.

High Fixed costs:

The rivalry remains among the firms as the there are high fixed cost associated and no one wants

to be driven out. Starbucks have high investments in stores. They have opened many stores like

mushroom in the market incurring them high fixed cost in real estates and setting up stores.

Lack of Differentiation or switching costs:

If the products are not differentiated the customers will be switching from one product to

another. It gives rise to more rivalry. The competitors want to win their customers by marketing,

playing price war and many efforts are taken. In the case Starbucks have differentiated them

tremendously in the market. They have positioned themselves superior to any other traditional

store in the market.

Customer Loyalty:

If the customers are loyal firms don‘t engage themselves in high rivalry. But as the customers are

not always loyal there rises the intensity of rivalry. They take different measures to gain

customer loyalty.. Starbucks have taken all the measures needed to make a strong and loyal

customer base. They try to develop satisfied customers all the time and they apply high standards


25

of excellence for the fresh delivery of their coffee. By all these efforts they have managed to

make a loyal customer base which has made the rivalry even more strong in the industry.

Brief Overview of the Porter’s five forces:

Forces Power

Threats of new entrants Moderate

Bargaining power of Suppliers Low

Threats of substitutes Low

Bargaining Power of Customers High

Rivalry among existing firms Low


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LIFE CYCLE:

The first concept which will be applied to the specialty coffee industry is the lifecycle. This

lifecycle is based on the assumption that all industries pass through a number of generic stages.

The four generic stages are introduction, growth, maturity, and decline. They are defined using

the rate of growth in sales in an industry. As an industry‘s sales grow and decline through the

numerous stages, inflection points can be marked in order to determine where the stages start and

end. This concept also makes the assumption that all industries go through an S-shaped pattern in

their sales growth.

Product life Cycle:

When analyzing the specialty coffee industry‘s sales growth from 1990 to 2002, as illustrated in

exhibit 1, we can see that the company‘s product are in growing stage. Starbucks is growing at a

rate of 25% per annum. This suggests that the specialty Starbucks coffee is near the growth stage

in the industry lifecycle. Having pinpointed where we believe the specialty coffee industry is in

the lifecycle allows us to assess the likely future evolution of the industry.

Company life cycle:

When analyzing the Starbucks sales growth from 1998 to 2002, as illustrated in Appendix 1, we

can see that Starbucks experienced growth in total sales between 1998 and 2002. We can

compare the two and pose a hypothesis as to where the specialty coffee industry is in this life

cycle. This suggests that the specialty coffee industry is near growth stage in the industry.

Sale

s

Time


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Industry life cycle:

Coffee industry is a huge industry and as the world population is increasing having sufficient

income the demand is on the increasing side. Coffee is an ever growing industry as it is taken as

refreshing drink all over the world. Its demand will always be increasing. The case also suggests

that the coffee industry has reached its saturation stage in the US market.

Sale

s

Time


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FINANCIAL ANALYSIS:

Starbucks listed in NASDAQ: SBUX and became public limited company and by then they have the

greater access to the finance.

Financial Ratio Analysis:

Liquidity Ratio:

1. Current ratio= Current asset /current liability

Year 1998 1999 2000 2001 2002

Current ratio 1.8791086 1.538615 1.470324 1.333932 1.57693

In the year 2002, their current asset was 1.57 times to cover the current liability.

The Current ratio was been declining from 1998 to 2002 and the relative change in current asset

was higher than the change in current liability.

2. Quick Ratio= (Current Asset-Inventory)/Current Liability

Year 1998 1999 2000 2001 2002

Quick ratio 1.0818942 0.818471 0.823227 0.836964 1.087256

In the year 2002, set their current asset excluding inventory were 1.08 times to cover the short

term obligation.

From 1998 to 2002, Quick ratio was not changed by a significant amount.

3. Working Capital = Current Asset-Current Liability

Year 1998 1999 2000 2001 2002

Working Capital 157.8 135.3 146.6 148.7 310.1

In the year 2002, Current Asset is exceeded current liability by $310.1.

The Working Capital was increasing from 1998 to 2002.

Most Liquidity ratio is increasing the refers the liquidity position of Starbucks is good enough to meet

the short term obligation.


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1.87

1.53 1.471.33

1.57

1.08

0.82 0.82 0.83

1.08

1998 1999 2000 2001 2002

Current ratio Quick Ratio


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Asset Management Ratio:

4. Inventory Turnover=Sales/ Inventory

Year 1998 1999 2000 2001 2002

Inventory turnover 4.04 4.13 4.77 5.03 5.13

In the year 2002, the company has sold out and restocked the inventory 5.13 times on average.

Inventory turnover was growing from 1998 to 2002.

5. Total Asset Turnover=sales/total asset

Year 1998 1999 2000 2001 2002

Total asset turnover 1.318191 1.346747 1.459909 1.431041 1.434447

In the year 2002, $1 asset generated $1.43of sales.

The asset turnover was increasing from 1998 to 2002.

6. Fixed Asset Turnover= Sales/Fixed Asset

Year 1998 1999 2000 2001 2002

Fixed asset turnover 1.9964912 1.947806 2.107423 2.107231 2.27574

In the year2002, $1 fixed asset generated $2.27 of sales

The fixed asset turnover was increasing from 1998 to 2002.

7. Days Sales Outstanding=365/Receivable Turnover

Year 1998 1999 2000 2001 2002

Days sales outstanding 14.224039 10.29998 12.80584 12.45602 10.83159

In the year 2002, Starbucks took 10.83 days on an average to collect the A/R .

The average collection period was decreasing from 1998 to 2002.

8. Average payment period= 365/Payable Turnover

Year 1998 1999 2000 2001 2002

Days Payable Outstanding 13.917246 12.13926 12.35328 17.62307 15.09319


31

In the year 2002, Starbucks took 15.09 days to pay the A/P.

The average payment period was increasing to 15.09 days in 2002 from 13.91 days in 1998.

9. Cash Conversion Cycle=Days in inventory+ Days Sales O-Average payment period

Year 1998 1999 2000 2001 2002

Cash conversion cycle 90.594606 86.48134 76.9891 67.41967 66.89987

In the year 2002, it took 66.89 days to recover cash investment on an average.

The cash collection period was declining from 1998 to 2002.

Among the asset management ratios inventory turnover ratio, asset turnover ratio and fixed asset

turnover ratio was increasing that refers the efficient use of asset. The increasing trends in DSO, Average

collection period, and the cash conversion period also refer the effective collection procedure.


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Debt Management Ratio:

10. Debt to Asset ratio=Total Debt/Total asset

Year 1998 1999 2000 2001 2002

Debt to Asset ratio 0.034 0.057 0.042 0.037 0.035

In year 2002, the company’s debt was 3.5% of total asset.

The debt to asset ratio was almost same in 1998 and in 2002.

11. Times interest Earned (TIE) =EBIT/Interest Expenses

Year 1998 1999 2000 2001 2002

TIE ratio -15.380 -21.466 -29.901 -26.028 -34.269

In 1998 to 2002, the company’s interest income exceeded the interest expenses.


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Profitability Ratio:

12. Gross profit margin=gross profit/sales

Year 1998 1999 2000 2001 2002

Gross profit margin 0.365 0.470 0.608 0.768 0.968

In the year 2002, the gross margin was 96.8% of total sales.

The gross sales margin was increasing dramatically in 2002 from 1998.

13. Operating Profit margin = EBIT/sales

Year 1998 1999 2000 2001 2002

Operating Profit Margin 0.083 0.093 0.097 0.106 0.097

In the year 2002, the operating profit was 9.7% of total sales.

The operating profit margin was increasing from 1998 to 2002.

14. Net profit margin= Net income/sales

Year 1998 1999 2000 2001 2002

Net profit margin 0.052 0.060 0.043 0.068 0.065

The net profit was 6.5% of sales in the year 2002.

The net profit margin was also increasing from 1998 to 2002.

The profit margin shows that the income is rising of the company. But the gross profit margin is

relatively much higher than the operating profit margin and net profit margin which indicates the higher

operating profit.


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Duo Point Equation:

15. Return on Equity= Net income/Total equity

Year 1998 1999 2000 2001 2002

ROE 0.086 0.106 0.082 0.131 0.125

In the year 2002, the shareholders have earned $12.5 for every $100 investment in the

Starbucks.

The return on equity was increasing from 1998 to 2002.

16. Return on Asset= Net income/Total Asset

Year 1998 1999 2000 2001 2002

ROA 0.069 0.081 0.063 0.098 0.094

In the year 2002, every $100 worth of Total asset were generating a net profit worth of $9.4.

The ROA was increasing from the year of 1998 to 2002.

Du point equation is not only reflecting the income. Besides income quality this ratios show the quality

of asset utilization and structure of finance. So Growth in ROA and ROE refers the good income

generation capacity, good asset management and healthy financial structure of the company.


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Stock Market Ratio:

Earning per share=Net Income/Number of share outstanding

Year 1998 1999 2000 2001 2002

Earnings per Share 0.191 0.280 0.251 0.477 0.558

In the year 2002, common stockholders had a profit of $.558 per share.

The Earning per share is increasing from 1998 to 2002.

Market to Book ratio= Market price per share/Book value per share

Year 1998 1999 2000 2001 2002

market to book ratio 4.085 4.689 6.631 4.084 3.314

In the year 2002, market price is 3.314 times higher than the book value per share.

The Market to Book ratio was increasing from 1998 to 2002.

P/E ratio=Price per share/EPS

Year 1998 1999 2000 2001 2002

P/E ratio 47.433 44.309 80.749 31.121 26.603

In the year 2002, shareholders were willing to pay $26.603 for each $1 of reported earnings.

The P/E ratio was declining rapidly from 19998 to 2002.

Even though the earning per share is increasing the decline in market price which leads to lower P/E

ratio indicates that the lower dividend or non-payment of dividend to the shareholders so that they are

not interested in the company’s stock.


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HUMAN RESOURCE PLANNING MODEL:

Forecasting Demand:

Consideration:

Product Demand:

The demand of coffee in the North American market is saturating. But the demand of Starbucks

coffee is increasing day by day. It is for the premium product and service they are providing to

their customers. Their stores have changed the traditional means of coffee shops. They make the

customers feel that they are in a third place where they can escape, reflect, read, chat or listen.

Starbucks average sales growth rate is 25% per annum where the other companies have reached

their saturation. So their product demand is increasing.

Technology:

There is no special technology used in the coffee industry with which the companies can be

advanced from another. There is also not much said about the technological utilization in the

coffee industry or in Starbucks.

Financial Resources:

As a Public limited company it could be assumed that they were solvent in financial

resources. Their initial public offering took place in 1992 (NASDAQ:SBUX). It also

undertook a public offering in Japan as a JV. These public offerings enabled them to raise

money from the capital market and invest for their expansion. They were financially sound

enough to open so many stores like mushroom. If we look at their balance sheet we will see

that they had a very little debt compared to their equity which refers their financial stability

and soundness.

Absenteeism / Turnover:

Starbucks took many policies to ensure that they maintain their employees and retain them in

the long run. They were the first in the US history who gave stock ownership plan as a

privately held company. They also offered health care benefits for the employees who

worked more than 20 hours in a week per week. They believed that if employee retention

was improved and quality of service preserved it pays off for the company. Later in the case

we see that the employee turnover is increasing and there is lack of motivation working in the

employees.

Organizational growth:

The company has grown rapidly since it started its operations. The company‘s main means of

expansion was to establish stores to consumer foot steps such as commuting routes, corner


37

locations and locating a third store between two stores. They have high growth in their

organization. Their sales also showed an average growth of 25% per annum. They have their

operations in 28 countries with 5700 and still growing which will bring more employment

opportunities for the people in the future.

Management Philosophy:

Starbucks became known as ubiquitous which means easily available. The management

especially Howard Schultz focused on building a global business which will be acclaimed

as one of the top 100 growing global brands. Their concept was to build Starbucks in

every corner of every city block of the world. They also redefined the coffee stores by

their premium coffee and superior service which was totally different from conventional

coffee stores.

They had a strong belief in motivating and retaining employees with their benefits. They

believed that their benefits would pay off if the employees are retained and they provide

good service. They provided their employees health care benefits, stock ownership plan

which were quite indifferent in the industry.

Starbucks is also taking part in CSR. They have taken three programs to support their

CSR initiatives-Procurement, Direct support, Conduit Brand Development. In the

initiative of procurement they are paying premium above the market price or New York

―C‖. They are also providing pre harvesting and post harvesting financing to the coffee

farmers. Starbucks was also a regular donor to a relief organization called Care who tries

to support farmers. Another CSR initiative was Conduit Brand development. They built

up some brands which would directly support causes for sustainable development.

Orion Smith, the CFO of Starbucks believed in strict organizational discipline, including

careful use of the Starbucks brand and insisted for many years on company-owned and

operated stores, rather than the franchising common among most American retailers.


38

Techniques:

Trend Analysis:

Starbucks was experiencing a healthy and sustainable growth rate with an average of 25%

growth in sale. Their stores increased from 165 stores in 1992 to 5886 stores in 2002. It

showed a growth of 43% in the overall market of national and international boundaries. Their

Starbucks net profit also shows a growth rate of an average of 49% which is very attractive

for any industry. Their share price also increased from the day they started and revealed an

average growth of 23%.

Managerial estimates:

Starbucks is expected to grow rapidly both locally and internationally. With the growth they

have in their mind they will have to hire more labors for their new stores.

Delphi technique:

The company faced high criticisms for some of their policies. They were highly criticized for

their market swarming expansion techniques. They expanded rapidly and wanted to be

present in every corner of every city block in the world. The experts suggested that Starbucks

would not be successful as coffee stores on both local and international markets as they don‘t

follow the conventional stores of coffee shops. They were also criticized for their lose CSR

initiatives. It was said that they use CSR as their brand polishing tool.


39

Forecasting supply:

Techniques:

Staffing tables:

In 1989 Starbucks appointed Howard Behar who had more than 20 years experience in

retail, as the director of store operations.

In 1990 Orin Smith joined the company as Chief Financial officer. He had extensive

experience in a number of organizations and consulting. He eventually became President

and CEO of Starbucks.

Howard Schultz continued to add key leaders in the company with a. view to expand

successfully.

Markov Analysis:

The case mentioned some fact about the fatigue of employees because of rapid expansion

though it didn‘t mention anything about the job change or rotation of employees.

Skills inventories:

Starbucks emphasized on providing superior service to customers. For that they provide

training to employees to understand customer needs better. From 1990 Starbucks expanded it

talent pool on the most influential senior levels.

Managerial Inventories:

Howard Schultz began assembling an experienced team of professionals to drive Starbucks‘

growth. In 1989, Howard Behar, with more than 20 years in retail, joined the company as the

director of store operations. In 1990, Orin Smith joined the company as Chief Financial

Officer and quickly filled the role of the company‘s right-brain to Howard Behar‘s left-brain.

Smith had extensive experience in a number of organizations and consulting, and was a

strong believer in process development.

Replacement Charts:

There is nothing in the case mentioned about the replacement charts or related anything

related to it.


40

Succession Planning:

Howard Behar was one of the potential persons in the company who had over 20 years of

experience in retail business. Starbucks could use him as an executive in the future if they

need somebody to give them a lead in any region. Orin Smith who was the CFO of Starbucks

had numerous years of experience in consulting. The company tracked him and he was a

potential candidate of becoming a President or CEO in the company.


41

External Considerations:

Demographic Changes:

The employees of Starbucks are becoming fatigue because of their policy of rapid expansion

which shows us a change in their attitude and they have become demoralized about the job.

Education of the workforce:

As USA and the countries they have expanded their operations to are highly developed

countries it could be anticipated that the educational level of the labor force is high.

Labor mobility:

There is nothing mentioned about the labor mobility in the case.

Government policies:

Government policy and statutory law is favorable for the labor force of the country which is

found in the event of the disputation of the law suit by store manager for the removal of

extra required overtime with underpaid.

Unemployment rate:

The countries they have their operations are highly developed referring that they have a low

unemployment rate. The lower unemployment rate can increase the cost of labor force in

their stores of operations.

Balancing Supply and Demand

From the demand side analysis we found that the demand of labor force is expected to rise for

Starbucks as they are expanding rapidly. As the unemployment rate was low in USA they don‘t

have a sufficient supply of labor. So they would have to pay higher wages and salary to their

employee.


42

PORTER’S DIAMOND OF COMPETITIVE ADVANTAGE:

When companies want to analyze how attractive a market is there are several theories and

models available; one of the most commonly used theories is Michael Porter‘s diamond model. It

has been widely used by companies to analyze potential markets, but also by countries to identify

qualities and specific advantages that can be used to attract an industry or a specific company.

Factor condition:

The first ingredient of national competitiveness is the availability or non-availability of things

that contribute to the production of goods and services in a particular country. Porter mention

factors like human resources (quantity, skills, cost), physical resources (abundance, quality

accessibility and cost), knowledge resources (the nation‘s scientific, technical and market

knowledge concerning the good or service), capital resources (amount and cost of capital

available to finance industry) and finally the infrastructure (type, quality and user cost of the

infrastructure available that affects competition). Porter means that the most important to have a

competitive advantage is neither the factors inherited nor the stock of factors that the nation

possesses at a particular time. The main factors are the ones created within the nation, the rate at

which they are created, upgraded and made more specialized to particular industry.

The coffee shops have recognized an increased knowledge about coffee from customers, staff as

well as suppliers. They are all more interested in the whole process from the beans growth to

how it is prepared in the coffee shop and which machines are used on the way. Rugman and

Hodgetts describe how education affects aspects of the culture. They also agree that in a more

advanced culture which the coffee culture is today there is a bigger market for more advanced

products. Demand for healthy coffee and that fair-trade coffee are high. But the knowledge and

interest is not only growing around the coffee itself but also the whole coffee culture. Not too

long ago we only had people serving coffee in different cafés, today they are coffee experts

working in coffee shops and even competing in their own championships.

USA and the other countries they expanded to were affluent with high level of income and this

made them quality conscious. High literacy rate of these countries ensured that educational

development of human resources and lower unemployment rate. They have their operations in

Japan, China, and in many European and Asian countries. These countries are most technological

advanced countries in the world and well-known for innovation.

USA is considered the most developed countries of the world and investors‘ heaven. Starbucks

has started their operations there and expanded rapidly. With the success in USA they were able

to move in other countries e.g. Japan, China, and other European countries. Huge population of

some these countries such as China indicates a large labor force ensures the supply of human

resources needed for production and operation.

The Real GDP (without the impact of inflation) growth rate of USA indicated that the overall

economy was going well and suitable to conduct business. Major proportion of GDP growth is

the growth in investment mainly in infrastructures. The countries they are selling in also have

good GDP growth.


43

Technological advancement is an important consideration for factor condition. In the industry the

technological condition is not important. Here they emphasize on service rather than product

development. So it is not a very important factor to be considered.

Demand conditions:

The second ingredient is the composition of demand for the product or service, which is the basic

of national advantage. Size and pattern of growth of home demand can increase this advantage

by affecting investment behavior, timing and motivation. The composition of demand shapes

how firms should perceive to respond to buyer need. Porter say for example that a small country

can be competitive in segments which represent an important share of local demand but a small

share of demand elsewhere, even if the absolute size of the segment is greater in other nations. A

nation have a competitive advantage if the domestic buyer are among the most sophisticated and

demanding buyers for the product or service in the world. That kind of buyers works like a

window into the most advanced buyer needs since they expect high standard in quality, feathers

and service. Porter also says that a nation have an advantage if the needs of the buyers in the

country anticipate those of other countries because this can be an indication of buyer needs that

will become widespread.

The customers‘ demands for coffee are increasing all the time. According to Porter the basic of

national advantage is the national demand for the product or service. Size and pattern of growth

of home demand can increase this advantage by affecting investment behavior, timing and

motivation.

We can see a positive pattern of the growth of demand towards a bigger demand for coffee

especially espresso based ones. The incensement of customers of all ages and at any time of the

day or in the week is also something positive. There is without any doubt a big demand for

espresso based coffee, even though a country is very small Porter claim that a small country can

be competitive in segments which represent an important share of local demand but a small share

of demand elsewhere, even if the absolute size of the segment is greater in other nations.

Porter says that a country with tough competition and domestic rivalry can have a competitive

advantage because this creates pressure on companies to improve and innovate; it also creates a

fertile environment for creating and sustaining competitive advantage. Something that is difficult

to reproduce through competition with foreign competitors. Porter also say that a nation have a

competitive advantage if the domestic buyer are among the most sophisticated and demanding

buyers for the product or service in the world. That kind of buyers works like a window into the

most advanced buyer needs since they expect high standard in quality, feathers and service. We

argue that Sweden is among the most sophisticated and demanding countries in the world and

therefore Sweden should be an attractive country for coffee shops considering establish on this

market. Porter say that a nation gain competitive advantage if they possess low-cost or high

quality factors like human, physical and knowledge resources.


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Supporting and related industries:

The third ingredient of national competitiveness is the presence or non presence of supplier

industries or related industries that are internationally competitive. A country can have a

competitive advantage since they can offer efficient, rapid and sometimes more cost-effective

inputs or machinery when there are supporting industries in the country. Another benefit of home

based suppliers is the access to information, new ideas and insight, and to supplier innovation.

The presence of an internationally successful related industry in a country creates opportunities

for information flow much like it does in the case with home based industries. The case has little

information about the suppliers but nothing is there about the related industry. The suppliers are

the farmers who are impoverished day by day as the coffee prices are decreasing day by day.

Strategy, structure and rivalry:

The last one of the main ingredient is the characteristics that shape domestic competition; The

typical size of companies, the way they are managed, and the way they compete are factors that

can help companies succeed or fail. The goals, strategies and ways of organizing firms in

industries vary a lot among countries. According to Porter it takes a good match between these

choices and the source of competitive advantage in a particular industry to gain a national

advantage. Different industries suit different types of organization. Many aspects of a nation

influence the ways in which companies are organized and managed, and these often grow out of

the educational system, social and religious history and family structure. There are also huge

differences among countries when it comes to the goals that the companies, their employees and

managers seek to achieve. Countries will be attractive if the goals of owners and managers match

the needs of the industry and if both employees and managers are motivated to develop their

skills and make efforts to keep a competitive advantage.


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A country with tough competition and domestic rivalry can have a competitive advantage

because this creates pressure on companies to improve and innovate; it also creates a fertile

environment for creating and sustaining competitive advantage. Something that is difficult to

reproduce through competition with foreign competitors. Porter also say that a nation have a

competitive advantage if the domestic buyer are among the most sophisticated and demanding

buyers for the product or service in the world. That kind of buyers works like a window into the

most advanced buyer needs since they expect high standard in quality, feathers and service. We

argue that USA is among the most sophisticated and demanding countries in the world and

therefore USA is an attractive country for coffee shops considering establishment on this market.

Porter say that a nation gain competitive advantage if they possess low-cost or high quality

factors like human, physical and knowledge resources.


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Country Risk Analysis:

The United States is generally considered the benchmark for low country risk and most nations

can have their risk measured as compared to the U.S.

The Political system is democratic and stable. Political stability is vital for any business.

The economy is one of the largest in the world. Besides USA is the most affluent country in the

world with a high per capita income and because of this the people of USA is very quality and

brand conscious which we have founded in the case about Starbucks.

The unemployment rate is lower than the comparative countries. Because of high employment

rate the supply of labor is not abundant in the country and the wage rate is higher.

The Judiciary system and law enforceability is very strong in USA. Labor act and policy is very

strict which we seen in the case when court held in favor of store managers who filed a law suit

against Starbucks for mandatory overtime with a under rate payment.

We know that USA as a nation possessing high quality factors; peoples scientific, technical and

market knowledge is concerning the good or service is good and is improving all the time.

People are getting more and more aware about heath issues and gain more knowledge about

coffee. Porter say that the best is if a nation possesses factors needed in a specific industry that

are both advanced and specialized, and we argue that USA is advanced when it comes to health

and environmental issues and specialized in coffee culture as one of the highest consumer nation

in the world where the population drink most coffee.


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ALTERNATIVES

As Starbucks wants to increase their sales with the satisfaction of their supplier, employees and

improvement of their images to have their best success in market as the most successful chain

coffee shop around the globe. Starbucks is expected to see the volume sales return to a positive

performance in the forecast period, recovering consumer confidence, which will accompany the

country‘s improved economic outlook. Improvements in confidence will see resurgence in the

purchase of non-essential indulgences such as coffee shop. As it is the mostly available chain

coffee shop around the globe, with sweet growth rates. For that reason we can achieve the high

profit margins. For the increasing sales we have chosen three alternatives to establish our

demand. They are-

1. Do nothing

2. Differentiation Focus Strategy

3. Companies do practice corporate social responsibility (CSR) and alliances with the

companies to reach the long term success and growth.


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Alternatives Evaluation:

Alternative 01:

Do nothing

Starbucks can avoid doing anything regarding their sales or anything else. Due to very

contradictory some options and problems Starbucks can take a decision for not doing anything to

increase their sales or improve their image.

Advantage:

1. It will save the investment

2. It will save the managerial cost for the Starbucks.

3. R&D costing will be saved.

4. They don‘t need to invest more to satisfy their farmers.

5. They don‘t need to invest more for paying up the employees and their work time.

6. Investment on improving image will be saved which can be utilized in different sector.

Disadvantage:

1. Starbucks will lose the opportunity to maximize their profit margin.

2. Due to higher availability their costing of store is very high which cannot be minimized

or covered up through the increased sales.

3. Their international market expansion could make their brand more known and it could

increase their brand value. So it they don‘t increase their sales or satisfy customer values

then it will be tough for them to maintain their quality.

4. Starbucks can lose their loyalty of customer due to less improvement in their sales.

5. They might lose their highly capable sales team who are specially trained with their

resources due to underpaid or overworked which might have a long term effect on their

future sales.


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Alternative 02:

Differentiation Focus Strategy

Porter‘s Differentiation Focus Strategy is the strategy can be employed by the Starbucks Corporation.

This strategy provides a product or service to a specific market niche and differentiates from competition

in specific areas. The value of the company is markedly not as a low-cost competitor. In the case of

Starbucks, the company is a high cost, specialized selection provider, offering specially tailored lines of

coffee and tea product to coffee loving customers for a premium price. Starbucks can utilize the focus

differentiation strategy thoroughly, and partners company marketing and advertising direction to this

strategy. Embracing the position as product quality leader and industry segment leader, Starbucks can

have humble approach to avoid promotion the company but allowing it to be promoted by supporting

customers and through its good works has been a successful strategy for the company to date.

While Starbucks has been very successful with the Differentiation Focus strategy through the use of

word-of-mouth marketing and strategic alliances, the future of the Starbucks Corporation could be in

some jeopardy due to increasing competition without some small changes. One danger Starbucks faces in

today‘s developing economy is the concern for the company that they will be surpassed by competitors on

both cost and on product quality. It would be very beneficial for Starbucks to maintain a close watch on

industry and market competitors, specifically other coffee shop establishments and the restaurant industry

entrants to the specialty coffee market. Both specialty coffee shop entrants can pose a challenge to

Starbucks in an effort to provide the best quality, service, and experience for the customer, while the

restaurant entrants to the industry are marketing their specialty coffee on a cost savings platform. With

these industry competitors attacking the Starbucks market share from both angles, it is essential for

Starbucks to find ways to remain cost competitive while providing the top-of-the-line, quality product.

Furthermore, it is also recommended that Starbucks consider implementing a marketing strategy apart

from alliances that does not solely rely on brand awareness, reputation, and word of mouth. While word

of mouth marketing is invaluable, it is essential with the growing competition on price and product for

Starbucks in the niche coffee industry to aggressively market to ensure and restate the company‘s

dominance in the diversification focus of specialty coffee.

Finally, in today‘s current economy, it is recommended that Starbucks broaden focus from simply high

end pricing and provide an economic package or economy offering during these tough economic times.

This does not have to be a long-term strategy, but could ensure the survival of the company through a

tougher economic time and also maintain the company‘s customer base for when the economy as a whole,

and thereby consumer wallets, are growing again. This would bring the company slightly away

from the differentiation focus strategy, but not so far as to move the company into a new strategic

marketing focuses. In conclusion, Starbucks is still in a growing stage, and with a few recommendations

for marketing improvement, can continue the product leader position currently held in the specialty coffee

industry well into the future.


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Advantages:

1. Use of word-of-mouth marketing can increase their sales under this strategy.

2. It would be very beneficial for Starbucks to maintain a close watch on industry and

market competitors, specifically other coffee shop establishments and the restaurant

industry entrants to the specialty coffee market.

3. Careful management of these linkages are powerful sources for competitive advantage

because it allows the company to resolve trade-offs across organizational lines and

processes, which are difficult to do for most companies

Disadvantages:

1. Both specialty coffee shop entrants can pose a challenge to Starbucks in an effort to

provide the best quality, service, and experience for the customer, while the restaurant

entrants to the industry are marketing their specialty coffee on a cost savings platform.

With these industry competitors attacking the Starbucks market share from both angles.

2. The Starbucks Corporation does not aggressively market the company or their product.

Instead, they are driving their sales through the company‘s image and reputation.


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Alternative 03:

Companies do practice corporate social responsibility (CSR) and alliances with the

companies to reach the long term success and growth.

CSR is entering a new era where suppliers from developing countries have significantly

increased in importance. It is almost becoming an obligation and responsibly many companies.

Nowadays, corporate social responsibility (CSR) is an important part of many business

organizations. It is concerned with how a company tries to be beneficial to all its stakeholder

groups. Many companies today run businesses with CSR especially big companies. They try to

involve in activities that will keep both the business and social environment sound. The

effects of CSR cannot be overemphasized; they range from companies running business well to

environmental improvements. CSR can also go a long way to improve on product quality and

service to customers. We wonder how companies run businesses with CSR in an adverse

competitive business world. Today, competitors of some businesses already practicing CSR and

beginning to embrace this new philosophy of business.

Starbucks Company can be succeeded in a world of business with CSR. We will investigate why

Starbuck Company engages in CSR and what definition this company gives to CSR. There has

been so much news out there about Starbucks Company, many consumers and employees

satisfied with their good sense of CSR. Moreover, it has many suppliers interested to operate

with them. It also has many organizations that complement the Starbucks Company´s efforts

towards CSR. Today, Starbucks has published many Corporate Social Responsibility (CSR)

annual reports that these are all available on the web site of Starbucks Company. In these reports

Starbucks Company shows how it is actively involved in a combination of activities linked to the

social, environmental and economic perspectives (triple bottom line thinking). In this study,

we intend to investigate how the Starbucks Company conducts business and integrates CSR

with their business. And also how the company have responsibility with the goals of

enhancing the lives of its stakeholders- partners of the company, customers, coffee farmers,

shareholders, community members, suppliers and others with whom the company works.

Starbucks does not aggressively market the company through traditional means but instead

focuses almost entirely on high-level marketing and branding of word-of-mouth and key

alliances and partnerships. The utilization of alliances can be a cornerstone of the Starbucks

Corporation marketing strategy. The strategic alliances of Starbucks can be one of the

foundational reasons for the corporation‘s long-term success and growth. Alliances are truly the

driving factor being their name and brand recognition. Starbucks forms alliances with companies

and social groups across the board, thereby broadening the exposure of the company, improving

the organization‘s brand image and reputation, and exposing their name and product on a regular


52

basis to potential new customers. In 1993, the company partnered with Barnes and Noble

bookstores to be the in-house coffee shop. Next, in 1996, Starbucks partnered with PepsiCo to

bottle, distribute and sell Starbucks Frappuccino. Starbucks can also formed alliances with ice

cream manufactures and hotel chains to offer Starbucks brand and flavored ice creams and

Starbucks coffees within the hotels.

Starbucks company engages the business ethics, which it can see Starbucks mission or

Starbucks code of conduct (from the part of Strong values drive customer value)

including company‘s policy both social and environmental. For instance, the environmental

stewardship which shows the company ways to protect environment such as recycling, water etc.

and community with firm support several on activities to improve communities.

Moreover, Starbucks has the long term relationships with suppliers to control the qualities

and prices, which they work together with suppliers and discuss strategic business to improve

and develop products. Starbucks focuses on social and environmental points where coffee

bean grows and support farmers by providing education, finance and fair trade too.

Advantages:

1. The effects of CSR cannot be overemphasized; they range from companies running

business well to environmental improvements.

2. Responsibility with the goals of enhancing the lives of its stakeholders- partners of

the company, customers, coffee farmers, shareholders, community members, suppliers

and others with whom the company works

3. The strategic alliances of Starbucks can be one of the foundational reasons for the

corporation‘s long-term success and growth. Alliances are truly the driving factor being

their name and brand recognition.

4. The utilization of alliances can be a cornerstone of the Starbucks Corporation marketing

strategy.

Disadvantages:

1. It was accused of polishing its image more than truly working to improve the lives of

those its existence depended upon: the coffee growers by the CSR.

2. If the alliance company cannot provide proper initiative strategically then Starbucks

might not be capable to expand their business successfully to increase the sales.


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RECOMMENDATION:

Why won’t we choose “Do nothing”:

First we reject do nothing, because it is not a wise decision to avoid a prospective market to

expand the business as well as brand recognition. By making brand known to around the globe

and make the profit out of it, is better decision for Starbucks.

Starbucks will lose the opportunity to maximize their profit margin. Due to higher availability

their costing of store is very high which cannot be minimized or covered up through the

increased sales. Their international market expansion could make their brand more known and it

could increase their brand value. So it they don‘t increase their sales or satisfy customer values

then it will be tough for them to maintain their quality. Starbucks can lose their loyalty of

customer due to less improvement in their sales even. They might lose their highly capable sales

team who are specially trained with their resources due to underpaid or overworked which might

have a long term effect on their future sales. For that reason it is not a better decision to do

nothing regarding a prospective company structure.

Why we won’t choose “Differentiation focus strategy”:

Here we bypass the ―Differentiation focus strategy‖ due to mismatch in their business mission

and vision. As they want to make it highly available in all over around the globe but the strategy

suggest making it targeting niche.

As the Starbucks, is following very aggressive marketing to expand their business to make it

highly available. But if they follow differentiation focus strategy then it might not be possible to

make it as they want to. Both specialty coffee shop entrants can pose a challenge to Starbucks in

an effort to provide the best quality, service, and experience for the customer, while the

restaurant entrants to the industry are marketing their specialty coffee on a cost savings platform.

With these industry competitors attacking the Starbucks market share from both angles. The

Starbucks Corporation does not aggressively market the company or their product. Instead, they

are driving their sales through the company‘s image and reputation.


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Why we are choosing “Companies do practice corporate social responsibility (CSR)

and alliances with the companies to reach the long term success and growth.”

Many people are awed by the speed of the growth of Starbucks. The success of the coffee

company in influencing the people‘s preference in buying coffee is something that could grab the

attention of everybody, most especially investors. Starbucks has established a unique image of

itself. Thus, it is clear that what the company is selling is not merely its coffee, but its brand

image as well.

Starbucks has run its business by driving Corporate Social Responsibility (CSR) as a tool that

covers the company in every sector of their business. Let‘s take the environment, for example.

Starbucks is really concerned about affecting the environment. By utilizing innovative

technologies to improve the effectiveness in its processes, they reduce costs and at the same time

they are preserving the environment. In terms of social strategies, Starbucks has splendid

strategies to cooperate with its partners and stakeholders. Starbucks has created a lot of activities

to encourage communities and to create long term relationships with them, which reflects on

their brand. In terms of economics, Starbucks is not only thinking about its benefits but also for

all parties related with their business, by following the laws of each country. Starbucks

has managed to create fair trade with its suppliers, customers, and even for their

competitors. It has made Starbucks very successful in its economic situation.

Moreover, CSR can build competitive advantage over competitors that Starbucks gain more

competitive advantage by engaging in CSR into every part the company. Specially, the company

focuses on their suppliers (coffee farmers) and partners (employees) which they have run

business as sustainable together. We think that the company has come to correct the way to run

business by fully practicing CSR and keeping their market position. From what we

investigated, a company‘s CSR practice relates to numerous different behavioral aspects

within a company. Many organizations argue that companies engaged in CSR can obtain

increased sales and market share, reduce costs and increased interest from investors,

improved employees motivation, improved brand awareness and image of the company.

However, we think that the company‘s CSR investments will affect the company‘s performance

positively as customers value CSR activities. It is the reason why the company has succeeded in

business world by CSR.


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IMPLEMENTATION Implementation:

Having determined the causes of Starbucks‘ current downfall, it is necessary to formulate a plan

to address these issues. Strategic change cannot be achieved without specifying which actions are

to be undertaken. Since the major issues were already identified, strategies for the remedy of

these issues need to be formulated. Proctor states, ―Strategy is a plan that integrates an

organization‘s major goals, policies, decisions and sequences of actions into a cohesive whole‖.

Thus, based on the above evaluations, the following recommendations are put forward.

To increase the sales it is required for Starbucks is to expand their business overseas. The most

attractive industry for any profit maximizing firm within a capitalistic society would be one in

which they can have a pure monopoly. In economics this refers to situations in which one

established firm can be the sole provider of a product or service in a particular market segment.

Among the different alternatives; we have chosen to Companies do practice corporate social

responsibility (CSR) and alliances with the companies to reach the long term success and

growth.

General Implementation:

Implementing the CSR and alliances in the Starbucks:

In the today‘s business world, there are many strategies being used to run businesses. In the

recent past, the topic of Corporate Social Responsibility (CSR) has grown rapidly. People are

starting to demand that companies take their social responsibility seriously. Many companies

have started to engage in CSR as a strategy in order to gain benefits that can give them

an added advantage over their competitors. There have been increasing numbers of companies

engaged in CSR to run their businesses. Nowadays corporate social responsibility (CSR) can

drive companies to succeed in business by increasing sales volume and brand awareness.

We decided to choose Starbucks Company because this company has a good reputation in terms

of social responsibility. Thus, we would like to investigate how Starbuck successes in the

business world are linked to CSR strategy. We would like to know how the company

integrates CSR and what factors have affected the company´s success over the years with

special reference to CSR.


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Functional implementation:

Triple bottom line: it is very difficult to talk about CSR without looking at triple bottom line

thinking (that is interactive thinking taking into consideration social, environmental and

economic factors). These three indicators of CSR are shown in fig 1 below.

Figure 1: Triple bottom line


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Economic:

Starbucks Company is one of world class organizations that are successful in business today. The

corporation‘s policy is that running ethnic business and doing the right thing are keys of

Starbucks business. Moreover, the company operates business in many aspects by engaging

environment, all people and following the laws of each country. Also, it endeavors to provide

quality of products and service as well as good relationships to both suppliers and customers. All

of these are long term strategies which make Starbucks successful. In order to understand

deeply, we present Starbucks business conduct as follows:

No doubt in previous business, economics has influenced our world. Every company in all

sectors has focused on the benefits or profits. Some organizations want to serve only

shareholders or financial reports. But nowadays it is difficult to do this if companies think

about merely their own benefits by ignoring social, environment and other stakeholders.

Because it is short term strategies and the firms will face several impacts of organizations. In

order to sustain economic businesses, companies should not only concern about benefits of

financial forms but also ethnic firms have to care to people or society and environment

as well.

From Eco-efficiency, companies have involved in competitive businesses by offering good

prices, products and services to improve the quality of life in order to make customer

satisfaction. In which these processes try to reduce environmental impacts. Natural resource

productions relate to maintaining environment and competitiveness which limited

environment has created innovation of products as an eco-efficiency. To develop economic

sustainability, all companies have to rely on ethnic businesses that they cannot run businesses

without responsible stakeholders such as their staffs, customers or societies who affect

directly to companies such as losing image, profits of companies and so on.

On other words, the ethic‘s company will receive a lot of economic benefits of organizations by

using innovations to operate their businesses which can increase the companies‟ benefits. For

instance, reducing the cost of productions, creating good qualities of products and good image

of media including building long run relationship with stakeholders too. It might say these

are win-win strategies.

Environment:

All mankind is involved with the environment. Everybody has used a lot of natural resources in

the whole life. Unfortunately, nowadays our environment is destroyed by people or

corporations that might not care about it of which there are many impacts on our planet such as


58

increasing pollution around the world, wastes water, climate change etc. because we don‘t care

about the environment enough.

There are two main things of significant natural capitals reformative or replacing natural

resources. Firstly, it is necessary for the reservation of life and ecosystem balance. Secondly, it

can renovate or replace natural resources such as solar cells in order to limit fuels From

many countries, there are regulations to companies for their environmental performances.

In order to protect the environment or ecosystem, we have to protect the environment by

reducing the use of natural resources because some resources can renew again by using

technological replacement such as using wind energy to produce electricity or recycle

products and also can reduce companies cost as well. Moreover we have to protect

environment at the same time by treating waste processes before sending to the environment. All

of the above show that, in maintaining the environment it is important that all parties have to

realize it. It‘s not only you and me but also everybody in our world.

Social:

Social development is one of the important parts in triple bottom line. It might be affected to

economics and environment too. Social capital is trust of people in society which some parts can

measure people ‗ability to work together in organization. These capabilities have importance to

develop sustainability in every status of society.

Social accounting focuses on evaluating people who have impacted to the corporation.

The area covers training, community relations, product safety, employment, education, do nation

and so on. For organizations, they have to be responsible communities both inside and outside

because it has impact to developing companies by providing good environmental

workplace, training skills, welfare, and human right. For outside organizations, it should make

good relationships with society by creating activities to support or help society such as

donating money into communication or improving society to become better life etc.

These companies will receive good feedback from communication and all employees to

corporate sustainable development.

The analysis of the evolution of the specialty coffee industry as a whole allows us to assess the

possible adaptation strategies for the one that would most appropriately fit with Starbucks long

term goals, while taking into consideration their current capabilities. Organizational theorists

believe in both organizational inertia and view evolution as occurring within individual

organizations through the process of variation, selection, and retention. Within Starbucks, one

source of organizational inertia is the capabilities and routines developed through their

established infrastructure and the set pattern of interactions among the numerous organizational

members, which has developed over time.


59

Another form of organizational inertia present at Starbucks is the complex configuration between

their strategy, structure, and systems. The fit that they have created between their numerous

components would be disturbed if the idiosyncratic combinations, which have allowed them to

succeed, were changed independently. Rather, any change to their overall strategy will have to

encompass additional changes to their structure and their management systems, culture,

employee skills and all other characteristics of the Starbucks‘ organization.

These forms of organizational inertia make it more difficult for an organization such as

Starbucks to reformulate their strategies without considerable capital investment and the

possibility of immeasurable costs in broken tradition and lost synergies. Therefore,

organizational inertia can be looked at as a barrier to change, but it is not absolute and

organizations have shown the ability to adapt to both changes over the generic lifecycle and to

technological change.

The first thing an organization must do to adapt to a changing lifecycle is to determine where the

industry is in that lifecycle. We have previously done this. From the assumptions made in this

analysis, we have postulated that Starbucks and the specialty coffee industry in the United States

is at the end of its growth stage and in the beginning of its mature stage. The changes that will

occur during this transition are largely predictable. The buyer market will slowly become fully

saturated and repeat buyers will become the primary constituents of the consumer base, with a

stronger emphasis on discounting and less differentiation between brands. Product quality will

continue to improve throughout the marketplace, leading to industry standardization and much

slower product development. Marketing will focus more on advertising a broad product line,

good service and packaging deals. Manufacturing and distribution will see some overcapacity

along with lower labor skills due to an increased demand for high labor skills relative to an

inelastic supply of labor.

Understanding these changes is the first step to establishing the capabilities necessary to

formulate a proper strategy to combat the negative attributes associated with a maturing industry.

These capabilities should allow a company such as Starbucks to pursue a strategy that does not

seek to increase market share. The appropriate strategy should attempt to maintain an image of

quality and enhance both effectiveness of existing marketing and use of new forms of marketing.

The next step is formulating a proper strategy to overcome the barriers to change present in an

organization such as Starbucks, in the form of organizational inertia. This would involve

developing a fundamental understanding of what the primary contributors to that inertia are.

This in turn involves identifying the existing routines and capabilities, the hierarchy structure,

along with the power structure and identifying the ingrained perceptions of the business from an

outsider‘s perspective.


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Formulate Strategic Marketing:

Strategic marketing is an important factor in any business. As discovered above, the company‘s

failure to draw a marketing plan created a gap in its value chain, which has caused a significant

deterioration in the company‘s brand image/reputation. The company needs to have a direction in

the marketing arena to further improve its image and brand recognition. Marketing is concerned

not only about promotional advertisement activities. Marketing planning is a process by which

organizationsattempt to understand the market conditions and the needs and preferences of the

customers whilst taking into consideration other organizations who are also competing in the

market. It involves satisfying the customer‘s wants and needs and managing relationships with

stakeholders. Drucker also emphasized that a business has only two functions, one of which is

marketing and the other is innovation. The aim of marketing is to create new customers and to

communicate with all of its stakeholders (customers, shareholders and employees). A company

cannot effectively implement any activity if no communication with all its stakeholders was

made. This is the role of marketing.

In the case of Starbucks, it has made little regards to marketing, as evidenced by its small portion

of budget array allotment for the said value-creating activity. It appears that the company relies

on its strong operational capabilities more in such a way that marketing has been put into the

sideline. Although this may have worked before, the changing market conditions warrant that the

company should start focusing as well in strategic marketing. Competitive advantage can be

gained and sustained with the help of marketing. Proctor argued that competitive advantage

should be market-led. Marketing is basically the distinguishing, unique function of a business.

Thus, Starbucks must focus a substantial amount of resources into improving its marketing

activities.

To gain competitive advantage, an organization must first define its strategy. One of the

authorities in the creation of strategy to achieve competitive advantage is Michael Porter. The

author defined strategy as, ―the creation of a unique and valuable position, involving a different

set of activities‖. Marketing strategy, therefore, is the formulation of a different set of activities

that aims to create a unique and valuable position in the market. The strategy includes the

creation of a plan to identify market conditions and to identify which segment of the market the

company will focus on.

Strategic objectives must also be set that will serve as a guide in the implementation of the

marketing strategy. It has been identified above that Starbucks employs a generic strategy of

focus with an emphasis on differentiation. This strategy, however, may now need to be revisited

and adjusted. Starbucks needs to communicate with its customers now. Starbucks also needs to

create new customers and new markets to prevent the saturation of its current market segment.


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Its marketing objective should be focused on creating new markets and, if necessary, new

products or product line to accommodate new customers. The company may create new products

that will have an appeal to the lower segment of the market, a segment which the company has

not yet fully tapped. Its pricing strategy, therefore, may vary accordingly with the creation of

these new products that aims at generating new customer s in the lower end of the market.

The firm‘s current marketing communications and customer relationship management practices

also need to be changed. As evidenced in the online survey, the customers are not feeling any

substantial improvement in Starbucks. If ever there are improvements that the company has been

doing in the previous years, these changes have not been effectively communicated to its

customers. These improvements in stores or customer service/relationships must be

communicated with its customers to make them aware that Starbucks is improving itself to

maintain the ―Starbucks experience‖ that its customers have been wanting for in the company.

On the aspect of exclusivity, the company also needs to enhance its current image of luxury.

Although it has been recommended above that the firm has to create new customers, or market

new segments, this will not necessarily have an adverse effect to its brand reputation. What the

company needs to do is to create a system of exclusive membership with rewards or privileges

for its frequent customers, especially the high end segment of the market and the students which

have been the company‘s traditional customers. Privileges and reward s exclusive only to

customers, whether individually or by group, who apply for regular membership in the company

can be formulated such as unlimited free Wi-fi access and/or free coffees or other products once

a week. The company can also create a function room in each outlet that the exclusive card-

bearing members can use. These privileges may help enhance the company‘s image and

reputation of exclusivity. Apart from that, the fees that will be collected from the annual

registration dues of the members can add up to the company‘s profit.

Enhance Operations Management:

Aside from improving its marketing capabilities, Starbucks also needs to improve its store

operations management. Operational effectiveness means the performance of similar activities

better than the competitors perform them (Porter 1998b). However, operational effectiveness

alone is not sufficient to gain or sustain competitive advantage. Porter (1998b) states that a

company can outperform its rivals if it delivers greater value to customers or create comparable

value at a lower cost, or the company should do both. It has also been identified above that the

company‘s value chain has gaps involving its operations. The company is into rapid expansion of

stores, however, the quality of its service or its brand‘s reputation has been sacrificed, resulting

into its relegation or into being perceived as similar to a fast-food chain rather than a luxury

coffee outlet. Starbucks has not been able to create greater value whilst offering overpriced

coffee.


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Thus, the company needs to improve its store operations management by enhancing the

appearance of each outlet. The company may also need to improve its customer service further

and make these improvements known to the customers, as indicated earlier. The addition or

improvement of store equipment and ornaments will provide a new look to the outlets. The

addition of a function room, as indicated above, for its exclusive card-bearing member s will

enhance even more the experience of exclusivity and luxury of each Starbucks coffeehouse.

Also noteworthy in the online survey is the attention given by customers to Starbucks being an

environment-friendly store. Therefore, the company must improve this standing by becoming

more environmentally friendly. It also has to give emphasis on buying Fair Trade materials since

this practice appeals to its customers. The firm must therefore align its resources to these

improvements in order to sustain its current position in the market and attract more customers,

and gain competitive advantage and strategic competitiveness.

In order to make the sustainability of company values organizations want to have good

leaderships. Currently, Leaders have to have many skills to conduct the company‘s strategies to

reach to the goal. One of them is communicating skills. The figure below shows that five

principles of sustainable value based service business.


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Improve Stock Market Standing:

To improve its stock market trading, Starbucks has to show that the company is a profitable

business. This can only be done if the company will continue to show that it has a sustainable

command of its brand/image reputation and recognition. The company has to significantly stop

the current downtrend in sales and profit. But in order to do this, the company must initiate and

implement changes within the organization, as recommended above. Stock market analysts are

closely monitoring the Starbucks shares‘ performance and profitability. Hence, the company

must enhance its reputation by showing significant and substantial improvement in its marketing

and operational activities to show that the company is in command of its future and that it can

maintain its current leadership in the specialty coffee industry. A part from that, the company can

also show that it has the capability to venture into new markets. This way, analysts will not

hesitate in giving a high rating to the company, and investors will not be reluctant at putting their

money into the Starbucks stocks.

Strategic Leadership Improvement:

Above all the changes that Starbucks needs, its leadership must be changed. Not that the

managers will be removed but their capabilities, skills and attitudes must be improved. No

organizational transformation will be complete if the leaders are not receptive of change.

Organizational change can be done only if the correct processes are implemented and the leaders

have been at the forefront of these activities. Leading organizational/strategic change is not an

easy task for managers or leaders of a company. There have been efforts that failed because of

oversight by the leaders. Whilst Starbucks leaders seem to have not failed, it is necessary that its

leaders should know exactly what to avoid in executing changes in the organization.

Increase International Expansion:

The first and most pressing action which Starbucks should take is to reduce their US expansion

efforts. Continued aggressive attempts at expanding in the United States by adding as many new

store locations as in the past will inevitably act to cannibalize existing locations same store sales.

The fundamental reason why this is true and why Starbucks should reduce their U.S. expansion

plan is the conclusion reached earlier in this analysis: that the specialty coffee industry in the

United States has entered the mature stage. One of the qualities inherent to the mature stage of

the industry lifecycle is overcapacity. Any significant expansion efforts in an environment

where overcapacity is present will be met with failure. By reducing their expansion efforts in


64

the United States, Starbucks can redirect the capital saved into their international expansion

efforts. The international market provides an ideal target for expansion for three important

reasons. First is the lack of penetration of specialty coffee in many nations and the potential

market share which these nations represent. For example, Starbucks currently operates roughly

16,000 stores with 10,000 in the United States and 6000 internationally. Yet, the United States

has not ranked in the top 10 for total coffee consumption per person in the last 25 years. This

suggests that internationally, there is an enormous coffee drinking population to be tapped into.

Another reason that international expansion presents a particularly good opportunity is due to the

likelihood that such expansion would act as a catalyst for innovation. For instance, originally,

Starbucks introduced their Tazo tea brand into the Japanese market. After a successful trial run

in Japan, Tazo was brought into the US market. More such innovative products should be tested

first in international markets because there, Starbucks does not put its brand reputation at as great

a risk. This is true since those markets have not been exposed to Starbucks for as extended a

period of time and, thus, the brand is more malleable in those markets.

Instead of selling discounted coffee under their ―segmentation‖ strategy, which seems aimed at

appealing to the price sensitive lower end of the market which is likely destined for McDonalds

and Dunkin‘ Donuts, Starbucks should concentrate on creating more elaborate discounting

techniques to employ with their most frequent customers. This both eliminates the potential

degradation of the Starbucks‘ brand and increases the bond customers will experience with

Starbucks. Additionally, a rewards program will encourage customers to visit Starbucks more

often and will dissuade them from visiting competitor stores, such as McDonald's and Dunkin'

Donuts, which seem unlikely to offer reward programs.

Rent out Meeting Space and Install Free Wireless Internet:

Next, Starbucks should create a more business and technology friendly atmosphere in its stores.

With the advent of the Internet and the ever increasing array of electronic products capable of

accessing it, there has been an increasing shift in consumer's work locations from office

buildings to home offices. With this shift and natural human psychological needs, Starbucks is

allotted an opportunity to cater to these consumers working out of the home by providing

meeting space for rent. These meeting spaces should be accompanied with the addition of free

wireless Internet access throughout every Starbucks store and printers accessible to the

customers, which are color capable and reasonably priced.

The meeting space should be offered at a per hour rate while the printers should charge per copy.

The availability of meeting space and printers, coupled with free wireless Internet access would


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encourage those consumers working from their homes to engage in business activities at local

Starbucks. Some of Starbucks‘ competitors, such as Caribou coffee, have already taken

advantage of this trend in consumer preference but do not currently have the market share to use

it as a defendable competitive advantage.

CD Burning:

In addition to free wireless Internet access, Starbucks could equip stores with a CD burning

device to allow customers to burn copies of the online albums they purchase within Starbucks at

a small fee. Not only would this increase the customer‘s options when purchasing an online

album but would also encourage customers to purchase online albums within Starbucks‘

locations. Thus, customers could not only get the electronic version of their selected music for

their IPods but could also have a hard copy CD for use in other devices such as the vehicles

which transported them to the Starbucks store. Having this extra incentive could well increase

foot traffic in Starbucks‘ locations. Additionally Starbucks could advertise their brand and music

label on the blank CDs. The labels of the CDs could use or incorporate Starbucks logo and the

interactive experience the customer will have watching their CD being burned and the label

being placed onto it will give them a greater sense of ownership.

Increase Connection with Customer:

One way in which Starbucks has always differentiated itself from its competition has been

through the emotional connection formed with its customers. This connection is formed in

significant part by creating a store atmosphere that fits the local settings and by training baristas

to increase the personal connection between themselves and their customers. Specifically,

Starbucks encourages feedback from their customers to induce a family like feeling and instructs

all baristas to greet every customer with the question ―how are you doing today?‖ To further

increase this emotional connection with their customers, Starbucks could implement digital

picture frames in all store locations and upload local customer photos and perhaps even customer

supplied family photos, which are appropriate in nature, upon request. Digital picture frames are

capable of holding thousands of pictures which would turnover regularly all day long. Such

digital picture displays are not expensive. They would not require major modifications to any

stores and would have an immediate impact on enhancing the family atmosphere. By allowing

customers the option of uploading some of their family photos into the digital picture frames,

Starbucks gives them the chance to personalize their local coffee shop and join a community.

This would be a modern, classier version of that time worn icon, the local pub with countless

photos of the regulars festooning the walls. Currently, the majority of Starbucks stores have latte

machines that are positioned in such a way as to block the baristas from viewing the customers

and vice versa when the barista is in the act of making the latte. These latte machines pose a

serious physical obstacle to the barista‘s ability to establish a lasting impression on the customer.

To increase the barista‘s opportunity to form the desired connection with the customer and also


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to give the customer a more worthy performance of the craft, skill, romance and theater which

are present while making an espresso, these latte machines should be lowered so as to give the

baristas a demonstration kitchen of sorts.

Continually Improve the Coffee:

Given the specialty coffee market‘s transition into the mature stage of the industry lifecycle, it is

important to maintain a reputation for the highest quality coffee in the industry. In February of

2008 the magazine Consumer Reports rated McDonald's drip coffee as tasting better than that of

Starbucks. To ensure the quality of their coffee, Starbucks should continually analyze their

brewing systems and practices and consider renovations. The brewing process should at all times

be judged based upon its ability to bring out the complexities and distinctive flavors of the

world‘s different exotic specialty coffees. Starbucks should also be intent upon protecting

whatever brewing process they deem to be the best through patents or acquisition of patents,

which would, in turn, provide a defendable competitive advantage.

Becoming More Environmentally Friendly:

Although many efforts are being made at Starbucks to enhance their image as being

environmentally friendly, as is true for all modern corporations, they still have much room to

improve, thus, further differentiating themselves. There is a growing positive public sentiment

toward companies that make every effort at being environmentally friendly. This is particularly

true among the demographic consumer base Starbucks targets. For the first 10 years of

Starbucks‘ existence, they would ask their customers whether they wanted their coffee to go or

not. If the customer chose to drink the coffee in the store, they were given a porcelain cup as

opposed to a disposable paper cup. The resurrection of this practice would be a simple way to

appear more environmentally friendly. Moreover, if marketed and operated correctly, such a

program could well save Starbucks money. To encourage customers to use porcelain cups,

Starbucks could offer in-house drinkers who choose to use the porcelain cups a discount.

Other examples of ways in which Starbucks could enhance both its actual green bona fides and

its image as an environmentally friendly company would include: selling to go mugs and re-

usable sleeves at affordable prices; implementing recycling bins; seeking to compost or

otherwise recycle food waste; and encouraging customers, using financial incentives, to recharge

plastic Starbucks cards as opposed to purchasing a new one. All of these steps would enhance

Starbucks‘ image of corporate responsibility and would help to further differentiate Starbucks


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from its competition. Ultimately, just as with the need for the company to continually analyze

and improve the coffee, going green should be a continual process. All employees should be

encouraged to suggest environmentally beneficial initiatives. Management should make constant

improvement in this area a very public company priority, which only seems appropriate for a

company with a famously green logo.

Wage and Hour Rules:

Starbucks has paid the salary and compensation for partners (employees) based on hours laws

and regulations that mean Starbucks offers the benefits fairly. Workplace Environment: All

partners (employees) have been treated with esteem and honor without insulting, bias,

unfairness, irritation and so on. On the other hand, they are working in the company under

friendly working environment.

Workplace Health, Safety and Security:

Officers and partners (employees) have cooperated to each other for following the safety

regulations, practices and training in order to prevent themselves from accidents or injuries.

Starbucks quality and Customer Protection:

Starbucks focuses on quality of products because customers‘ health and safety are significant for

business. Company ensure ever process that is clean and hygienic including good service and

facility in the shops.

Compliance with laws and regulations:

Starbucks Company has followed the laws, rules or regulations of every country where

organization run businesses. In order to ensure, the company operates ethnic business and

follows officially permitted standards.

Fair competition:

Starbucks relies on fair competition laws and supports in free market. However, Starbucks

has to have agreement with competitors or suppliers under regulations such as not talking


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about price, products or markets with competitors or customers do not try to control the market

etc.

Supplier:

Starbucks has made long term relationships with suppliers and sellers as well as work

closely together with them. The company has supported coffee farmers every aspects such as

Fair trade by guarantee prices, offer financial credits, education and even housing. In order to get

high quality products and control prices as well as protesting environment where coffee bean is

grown and also rising farmer revenue as well.

Sales practices and advertising:

Organization focuses on truth and honesty to customers. Not only the products and service but

also advertising as well. All of these are transparent which customers can prove them.

The Third Place:

In today's interconnected world it is important to develop a feeling of community. This is part of

the reason Starbucks is so adamant about ensuring the well-being of its suppliers, for they are a

part of the company's greater community. A large part of Starbucks‘ appeal to people is the

sense of community the customers feel when they walk through the door. Starbucks tries to offer

a ―third place‖, where people can get away from the daily routines of their lives and enjoy a cup

of coffee from Sumatra, Kenya or Costa Rica. It is a place where the noise and hostility ever

present in the city dissipates.

Most important, it is a place that offers casual social interactions. Ray Oldenburg, a Florida

sociology professor, attributes much of Starbucks‘ success to its ability to offer this third place or

as he puts it, the great good place in modern society. He explains that, ―without such places, the

urban area fails to nourish the kinds of relationships and the diversity of human contact that are

the essence of the city. Deprived of these settings, people remain lonely within their crowds.‖

The ability of Starbucks to take advantage of this need for a third-place is not entirely

attributable to their own strategic planning. Many other developments unassociated with

Starbucks were occurring during their aggressive expansion. Two of the most prevalent themes

during the 1990s and early millennium were that of increasing numbers of people working from

their homes and the increasing use of the Internet and mobile computing devices capable of

accessing it. Both of these developments aided Starbucks in the additional flexibility that they

afforded the general population.

Today, Starbucks has gone to great lengths to take advantage of these advantageous environment

changes. For example, they have recently struck a deal with AT&T, which will allow them to

offer free wireless internet access to some customers at the majority of its US stores. The deal

will give approximately 12 million broadband customers unlimited free access to the internet at


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more than 7000 Starbucks‘ locations. Additionally, Starbucks will give two hours of free

internet access per day to people who have a Starbucks‘ card, which is a card customers can load

with money to pay for purchases. Starbucks has also enabled customers to access an iTunes play

list in stores, which shows the music playing in real time and gives them the opportunity to

purchase music digitally.

Starbucks‘ success thus far can be attributed to five primary factors. The first of these factors

was their ability to design a strategic approach to growth that quickly demonstrated the

feasibility of their business model and took advantage of some key demographic groups. Next

was their ability to attract the highest-quality employees through the implementation of a

superior healthcare plan while reducing costs and giving equity ownership to all employees. The

strategic alliance they had with conservation international allowed them to create a sustainable

supply chain of high quality coffee. The three previous factors helped enable them to foster the

fourth factor in their success, a community environment in which casual social interactions could

take place. The fifth factor to their success was their ability to adapt to the changing dynamics of

their consumer demographics. All of these factors have allowed them to stay at the forefront of

the specialty coffee industry.

Human Resources Management at Starbucks:

Starbucks realized early on that motivated and success of a retail business. Therefore the

company took great care in selecting the right kind of people and made an effort to retain them.

Consequently, the company‘s human resource policies reflected its commitment to its

employees.

Starbucks relied on its baristas and other frontline staff to a great extent in creating the

―Starbucks experience‖ which differentiated it from competitors. Therefore the company paid

considerable attention to the kind of people it recruited. Starbucks‘ recruitment motto was ―To

have the right people hiring the right people.‖

Starbucks hired people for qualities like adaptability, dependability and the ability to work in a

team. The company often stated the qualities that it looked for in employees upfront in its job

postings, which allowed prospective employees to self-select themselves to a certain extent.

Having selected the right kind of people, Starbucks invested in training them in the skills they

would require to perform their jobs efficiently. Starbucks was one of the few retail companies to

invest considerably in employee training and provide comprehensive training to all classes of

employees, including part-timers.


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Integral Implementation:

Strategic change is the call of the day for Starbucks. Perhaps, this is the time that the company

will need to revisit its existing business models, practices and strategies to know whether these

models still conform to the conditions of the market. The company has been in the business for

two decades, and undoubtedly has been the industry leader for almost the same length of time.

However, since market conditions change as evidenced by the current events and continuing

globalization of markets, the company may need to reform its strategy.

Starbucks may have already saturated its current market or its strategy may have been going into

a different direct ion, one that is going away from the objective market situation. As such, the

company has to implement a strategic change. Its management practices may need to be revised.

It is the customer that determines what a business is. In this sense, Starbucks should identify

what the customer wants, what they need and what they prefer, not the other way around. In the

course of its practice in the previous years, Starbucks seems to be content in expansion alone, not

communicating with the customers to know what their preferences have been. It must be

emphasized that customers‘ needs and preferences are always changing. Hence market

conditions also change. In this context, Starbucks failed to keep up with the changing customer

behavior and market conditions. Thus, in the last several months, Starbucks‘ performance is

going on a downtrend. It is imperative that the causes of this downtrend must be identified and

remedies must be put in place.

The remedies, however, need to be long-term, not only short-term. Whilst short-term actions are

needed to address tactical changes, it is more important to set a strategic goal, or if necessary,

revise the current strategic goal to conform to the realities in today‘s business environment and

the future of the business. Thus, it was recommended that Starbucks should focus on marketing,

while enhancing its operational effectiveness. Marketing has been the missing component in the

Starbucks practice in recent years. It is therefore significant to put emphasis on this area.

Apart from that, the company‘s leadership must be transformed as well. It has been

recommended that the organization‘s leadership should adopt some behavior, traits or skills that

are necessary to implement successful changes in the organization. Several practices and

principles have been described in this paper to serve as a guide or reference in the leadership

practices of Starbucks executives and managers. These principles have been set as a product of

studies of academicians and practitioners in the field of management, marketing and other areas

of business. It is highly recommended that Starbucks should implement these changes within the

organization in order to maintain its current standing in the industry and achieve strategic

competitiveness.

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