Strategic Management

Company Report

Starbucks

1.0 IntroductionThis report will provide an in depth strategic analysis of Starbucks, highlighting the strengths and weaknesses of the company and how it has progressed over time. By providing a separate internal and external analysis for the company it will possible to identify its distinctive competencies, therefore allowing recommendations to be made for future strategic development.

1.1 Company history and background

Starbucks originated in 1971 where it started as a roaster and retailer of whole bean and ground coffee, tea and spices with a single store at Seattle's Pike Place Market. Today the company covers 50 countries with 17009 stores, 8870 of which are company owned and 8139 are licensed stores. Starbucks uses ethically sourced produce in all of it's products and this can be seen as a unique selling point for the firm. The Starbucks mission statement is;

'to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time.'

Starbucks.com(2011)

Starbucks became a Public Limited Company on June 26th 1992 with a price of $17 per share and closed trading on the first day with a price of $21.50 per share. The company's common stock is listed on NASDAQ under the trading symbol SBUX. Starbucks is committed to doing business responsibly and the company conducts itself in these ways to maintain the respect of customers and staff members. The company covers three major areas in order to convey their commitment to responsible business;

1. Ethical sourcing - Starbucks is focused on developing long term relationships with worldwide farmers in order to maintain a high product quality.

2. Environmental stewardship - The company highlights their commitment to the environment, working to reduce its environmental 'footprint' through energy and water conservation, recycling and construction.

3. Community involvement - Starbucks is constantly increasing it'svolunteer hours spent with communities.

1.2 Corporate Social Responsibility (CSR)

Starbucks places a huge emphasis on it's corporate social responsibility as it is used to highlight the firms commitment to its environmental awareness, which helps raise the profile of the company. Starbucks has shown this commitment to environmental awareness in the following ways;

- The company held a conference with local governments, cup manufacturers and recyclers in 2009 to jointly identify the steps required to make beverage cups recyclable.

- Starbucks aims to reduce energy use in new stores by 25% and to obtain 50% of energy from renewable sources in all company-owned outlets.

- There is a commitment to reduce water usage by 15% in all company owned stores by 2012.

- There is a commitment to supporting programs that facilitate farmers access to carbon marker which will help to prevent deforestation.

- Measures have been put in place to manage waste, protect water quality, conserve water and energy, preserve biodiversity and reduce agrochemical use.

- The company is currently working to build a network of resources for suppliers to improve their social and environmental performance.

Starbucks has shown that corporate social responsibility is an important factor as the business has grown. Moskowitz (2008) states that 'companies with high CSR standards, are able to clearly demonstrate responsibility to investors, legislators, shareholders, employees, customers and the general public, and therefore manage risk and enhance their corporate reputation.'

1.3Strategic Timeline

In 1982, 11 years after opening it's first store, Starbucks appointed Howard Schultz as director of retail operations and marketing. His first move for the company was to start selling to fine dining restaurants and espresso bars in an attempt to raise the company profile among an affluent market. A year later, Schultz recognises the popularity of espresso bars in Italy when travelling and identifies the potential of developing coffee houses in Seattle, where there is a very different culture. This development of the company is first tested in Seattle city centre and with the success

of this venture Schultz is able to set up 'Il Giornale' offering beverages made from Starbucks coffee beans. Schultz had now began a new venture with this business and 2 years later purchased the Starbucks assets, changing the name of the company to Starbucks Corporation. Over the next 3 years up until 1990, Starbucks had expanded its headquarters in Seattle and was able to offer full health benefits to all employees with the company currently owning 84 stores across the United States and Canada.

By 1993, the company had become public with common stock being traded on the NASDAQ national market, and had a total of 272 outlets. The main expansion of the company was the opening of a new roasting plant in Washington. The first stores to be opened outside of the United States were in Japan and Singapore and the company went on to develop a partnership with Pepsi-Cola North America, selling bottled coffee drinks. This was a bold strategic move by the company as it became their first move into the retail sector where they aimed to support their current sales from outlets.

In 1997, the company began The Starbucks Foundation which was it's first step in community involvement. This move gained great support from locals which helped the company to gain a better reputation as the foundation benefited local literacy programs. By 2000, Starbucks had acquired Hear Music - a San Francisco based music company and Tazo - a tea company. The company had also partnered with Conservation International in an attempt to promote sustainable coffee growing practices and established a licensing agreement with TransFair USA in order to sell Fair Trade coffee at some outlets, as the total number had reached 3501. These moves by the company helped to highlight their commitment to doing business responsibly within the introduction of Fair Trade produce being used. This was again supported by 2004 when the company introduced ethical product sourcing guidelines and entered into licensing agreements with National Fair Trade organisations to sell Fair Trade products in their stores in any country.

Starbucks had established its commitment to their environmental responsibilities over the next few years and also highlighted the company's innovation by releasing the industry's first paper beverage cup with recycled fibres. This was followed up by the introduction of Starbucks Shared Planet which helped to show the company's long term commitments on conducting business responsibly and also began partnership with (RED) which helps to save lives in Africa. In the following years up until 2011, Starbucks engaged in technology based innovation, with the introduction of free Wi-Fi in stores and Starbucks iPhone apps. The company as a whole has demonstrated over the years it’s ability to react effectively to changes in the environment. By focusing on three factors of ethical sourcing, environmental awareness and community involvement, Starbucks uses these factors to provide a product that customers want, whilst complying with how customers want to receive it.See Appendix 1 for a breakdown of when new stores were opened by the company.

2.0 Internal Analysis

2.1 SWOT Analysis

It is important for a company to use situation analysis which involves the process of finding a strategic fit between external opportunities and internal strengths whilst also considering external threats and internal weaknesses. Mintzberg (1994) highlights the importnace of producing a SWOT analysis, stating that 'a SWOT analysis underlies all attempts to formulate a company's strategy.' By producing a SWOT analysis it allows us to analyse important factors that may affect the business in the current situation. This will also help to identify the firm's distinctive competencies and also a series of opportunities that possible for the company. Although the SWOT analysis is seen as extremely useful for companies, some criticisms suggest that it can sometimes be too ambiguous and it uses no weights to reflect priorities, yet this is less relevant to Starbucks as the company has a clear set of factors affecting its performance, which can be seen in figure 1.

Figure 1Strengths Opportunities- High brand equity

- Operating in 50 countries

- Environmentally friendly

- Good financial conditions/history

- Fair Trade licensee

- Possible to enter into Asian marketplace

- Product diversification

- Co-branding with other food manufacturers

- Retail sale of products in supermarkets

- Involvement in charitable organisationsWeaknesses Threats- Higher prices than rivals

- Highly dependant on coffee product

- Less control on stores outside of the US

- Have had protests against them

- High operating costs

- Current recession may impact sales

- Entry barriers in international markets

- Varying coffee prices in developing countries

- Imitation from competitors

- People becoming more health conscious

2.2Internal Factor Analysis Summary (IFAS)

This is and internal factor analysis summary of Starbucks and this is powerful tool which is used for strategic analysis of a company. Each of the strengths and weaknesses of Starbucks is given a weight which will reflect the importance of the factor to the company's future success and this is shown in figure 2.

Figure 2Internal Strategic Factors

1Weight

2Rating

3Weighted Score 4

Comments5

StrengthsS1 High brand equity .15 5.0 .75 Very memorable

brand imageS2Operating in 50 countries .10 2.5 .25 Covers a wide

marketS3Environmentally friendly .10 4.0 .4 This is a unique

selling pointS4 Good financial conditions/history

.05 2.0 .1 This shows the business' financial

strengthS5 Fair Trade licensee .15 5.0 .75 This is a unique

selling pointWeaknessesW1Higher prices than rivals .05 2.0 .1 Will not be major

factor W2Highly dependant on coffee product

.15 3.5 .53 This is the main product of the

companyW3Less control on stores outside of the US

.05 2.5 .13 This is due to huge expansion of the

firmW4Have had protests against the company

.10 3.0 0.3 Less important due to environmental

awarenessW5 High operating costs .10 2.5 .25 Key to financial

successTOTAL SCORES 1.00 3.56

In the table above, it can be seen that the two most important factors to the success of Starbucks is its high brand equity and that the company is a Fair Trade licensee. These two factors have helped Starbucks to gain a worldwide recognised brand image and with its Fair Trade license this has become a huge selling point for the company. This fits in with the company's strategy with its commitment to Fair Trade produce and its dedicated approach to becoming environmentally friendly. The strong financial situation the company is in is a great strength as it is able to gain the financial backing to expand into other countries and continue to grow the company even further. The main weakness of the company is shown to be it's high dependence on the coffee product, therefore showing that any changes in the prices of coffee beans would have a major effect of the company's finances. The total weighted score for Starbucks is 3.56 which is above the average of 3.0, therefore showing that Starbucks is conducting business in a positive manner.

2.3 Value Chain Analysis

Chen (2009) states that;

'a value chain is a linked set of value-creating activities that begin with basic raw materials coming from suppliers, move on to a series of value-added activities involved in producing and marketing a product or service, and end with distributors getting the final goods into the hands of the ultimate consumer.'

A value chain is therefore to process from raw material to the customer and how value is added along the way. This is shown in figure 3.

Figure3

The value chain process of Starbucks is straight forward as it follows the sequence shown in figure 3. The inbound logistics for Starbucks consists of the coffee beans bought from farmers. The operations and outbound logistics then consists of producing the product ready for storage in the firm's warehouses. The marketing and sales section is very important to Starbucks as the company portrays itself in a very socially responsible way and the company has managed to develop a memorable brand image. However, Starbucks has mainly managed to grow its brand image through rapid expansion which has increased brand awareness significantly.

2.4 Core Business Competencies

Tangible factors- Starbucks.com states that the company has core ownership over the Narimo Supremo coffee bean, which is considered to be the finest coffee bean in the world.- Starbucks has ownership of several coffee processing plants.

Intangible factors- Reputation - Starbucks has a fantastic reputation which is aided by the acquisition of its Fair Trade license and the company's constant involvement with charitable organisations.- Potential market - Due to the rapid expansion of the company, Starbucks is able to access a huge global market.

Human Resource factors- Employee culture - Starbucks refers to all of its employees as partners, who they work with in order to grow the business in all areas.

- Employee training program - Starbucks has a well established staff training program to ensure that all staff members have a high level of knowledge and skills.

Starbucks continues to find new innovations which are ethically sound in order to grow the business profile.

3.0 External Environmental Analysis

3.1 External Factor Analysis Summary (EFAS)

The external factor analysis summary of Starbucks highlights the importance of the individual opportunities and threats affecting the business. These are given a weighted score to determine the most effective factors. See figure 4.

Figure 4External Strategic Factors

1Weight

2Rating

3Weighted Score 4

Comments5

OpportunitiesO1Possible to enter into Asian marketplace

.15 3.5 .53 Potential lucrative market

O2 Product diversification .1 2.0 .2 Able to divulge into differing products

O3Co-branding with other food manufacturers

.05 2.0 .1 Create partnerships to help expansion

O4Retail sale of products in supermarkets

.05 2.0 .1 Allow products to be sold through

retailO5 Involvement in charitable organisations

.15 4.0 .6 Help maintain corporate social

responsibility ThreatsT1Current recession may impact sales

.05 2.0 .1 May affect sales due to less money

being spentT2 Entry barriers in international markets

.05 2.5 .13 Potential blocks from entering

marketsT3 Varying coffee prices in developing countries

.2 4.5 .9 Can have a major effect on the end

product priceT4 Imitation from competitors .15 4.0 .6 Could steal

customers with imitations

T5 People becoming more health conscious

.05 2.0 .1 People may eat and drink out less

TOTAL SCORES 1.0 3.36

As seen in figure 4, the most beneficial opportunity for Starbucks is to become more involved in charitable organisations. This would continue with the company's ethos by practising good business, whilst allowing Starbucks to become more involved with the community. Thompson (2004) highlights the importance of this, stating that the 'secret to Starbucks merciless growth' is due to their involvement with local communities. Holmes (2002) supports this by stating that a big factor in Starbucks success is the 'socially acceptable' manner in which the company immerses itself into the local community in an attempt to develop peoples passions.

3.2 TOWS Matrix

It is important for a business to conduct a TOWS matrix in order to identify key strategies to drive the business forward, focusing on the strengths, weaknesses, opportunities and threats that have previously been identified. David (2001) states that by using a TOWS matrix, it is possible to create alternate strategies that would previously not have been considered. See figure 5.

Figure 5

Internal factors StrengthsS1High brand equityS2Environmentally friendlyS3Fair Trade licensee

WeaknessesW1Higher prices than competitorsW2High dependence on coffee pricesW3Less control outside of the US

External factors

OpportunitiesO1Expand into Asian marketsO2Involvement in charitable organisationsO3 Retail sale of products

SO Strategies- Grow vertically to include low cost countries using the good brand.- Use the Fair Trade license to become involved in other charitable organisations.

WO Strategies- Diverse into different types of retail product to reduce dependency on coffee.- Become more involved with charities so customers are less concerned with rival's lower prices.

ThreatsT1 Varying coffee pricesT2 Imitation from competitorsT3 Global recession

ST Strategies- Differentiate using the high brand recognition to reduce imitation from competitors.- Profit from the growing company by integrating backwards vertical to avoid volatile coffee prices.

WT Strategies- Reduce costs in order to reduce prices to help survive in the financial crisis.- Improve international relation with suppliers to get better long term prices for coffee.

From figure 5, it is clear that several effective strategies have been identified for Starbucks to implement. Arguably, the most effective strategies have been developed using the company's strengths and opportunities. This allows a strategy to be developed based on the company's strengths whilst taking advantage of any available opportunity. The key strategy to be used would be to use the Starbucks' existing Fair Trade license to become more involve in charitable organisations as this will help to develop the company brand image in a positive manner.

3.3 Porter's Five Forces

Porter (2000) states 'the collective strengths of five forces determine the ultimate profit potential in the industry, where profit potential is measured in terms of long run return on invested capital. These forces are shown in figure 6 below.

Figure 6

Finntrack.eu. (2010)

Starbucks has maintained strong relationships with suppliers as the business has expanded. This has allowed them to get competitive prices and have benefited from economies of scale. There is a lot of risk of entry by potential competitors due to the low start up costs of entering the sector. Firms such as McDonalds have been able to enter the sector and offer speciality coffee s at competitive prices to help lure customers away from Starbucks. Starbucks resists this type of competition by relying on their strong brand image to maintain customer support. There is also a lot of local coffee shops offering competition to Starbucks which local shops investing money in research and development to create new flavours in order to attract new customers. The main threat of substitutes is alternative drinks that are easily accessible. These drinks include water and soft drinks which can be obtained from vending machines in public places.

4.0 Company Finances

4.1 Income statements

Appendix 2 states the financial status of Starbucks for the first quarter fiscal of 2011. It shows that the company is continuing to grow as it has an 8% increase on the figures from the previous year. This therefore shows that with use of strategic analysis of the company’s previous performance, improvements can be made which will increase the company’s turnover.

Appendix 3 shows the income statement for Starbucks. Scott (1972) highlights the importance of financial analysis stating that 'the use of financial analysis allows a company to identify independent factors that may be affecting the business' financial performance.' From appendix 3, it is clear that net profit has been steadily increasing over the last year which will reflect the company's positive strategic performance. With profits increasing, Starbucks has developed its strategy and continued its involvement with charitable organisations to again raise the company profile in a positive manner. The income tax expense has also been increasing over the past year yet this has had little effect on the company's profits for the year. Overall the income statement is showing positive figures which will reflect the company's progression.

5.0 Competitors

As the coffee market is fairly broad, Starbucks has to deal with potential imitation from a host of competitors in the marketplace. The 'coffee culture' across the globe is growing, particularly in the UK with several outlets selling coffee based products or speciality hot drinks.

5.1 Costa CoffeeCosta Coffee is seen to be Starbucks main high street competitor in the UK with competitive prices to rival those of Starbucks. The company offers a similar service to that of Starbucks yet does not have a company profile to match. Starbucks has superior environmental concerns and better business practice

5.2 Café NeroCafé Nero is another of Starbucks high street competitors targeting the same market yet offering a slightly different experience. Café Nero offers a café experience with a larger selection of food yet similar drinks available to customers.

5.3 McDonaldsStarbucks would traditionally not be concerned with McDonalds being a rival, however McDonalds have recently introduced a new initiative, offering good quality coffee and highlighting its convenience to customers.

Overall, there are several businesses in the marketplace that are trying to compete. Marketresearchworld.com (2010) still maintains that Starbucks is the market leader in this sector. This is again due to the strong brand image that Starbucks possesses and leaves rivals unable to compete due to a lack of market share. Starbucks also maintains this high market share with its huge number of outlets across the globe. The company's strong involvement in local communities allows them to make any necessary changes after feedback is gained from customers.

6.0 Recommendations

Starbucks mission statement reflects the company’s current situation very well and should therefore be kept the same. In terms of product development, Starbucks needs to continue to invest money in development new enterprises for the company. The company should focus on more product differentiation in order to better local competitors and others outlets. Also, as Starbucks is currently very environmentally aware, the company needs to maintain its good relationships with other countries in order to continue good sales progress. Finally, Starbucks should look into expanding into the potential lucrative Asian market as this is one area they are yet to do so. With the current customer and financial backing, Starbucks should be able to continue to grow as a business, maintaining success in the future.

References

Chen, W. et al. (2010).Strategic management: Undergraduate programme in service sector management. Pearson Publishing.

David, F. (2001).Strategic Management: Concepts and cases. Twelfth edition.Pearson education, New Jersey.

Holmes, S. (2002). Plant Starbucks: To keep up the growth, it must go global quickly. Business Week.Available: www.businessweek.com. Last accessed 19th March 2011.

Marketresearchworld.com (2010).Coffee Shops in the UK.Online at: http://www.marketresearchworld.net/index.php?option=com_content&task=view&id=118&Itemid=77

Minzberg, H. (1994).The Rise and Fall of Strategic Planning. Prentice Hall, Hemel Hempstead.

Moskowitz, J.. (2008). The Growing Importance of Corporate Social Responsibility.Available: http://ethisphere.com/the-growing-importance-of-corporate-social-responsibility/. Last accessed 18th March 2011.

Porter, M. (2008).The five competitive forces that shape strategic management.Harvard Business Review.

Porter, M. (2000).Competitive Strategy: Techniques for analysing industries and competitors. Free press, New York & London.

Scott, D..(1972). Evidence on the importance of financial structure. Available: http://www.jstor.org/pss/3665143. Last accessed 15th March 2011.

Thompson, J.. (2004). The Starbucks Brandscape and Consumers’ (Anticorporate) Experiences of Glocalization. The Journal of Consumer Research.31 (3).

Wheelen, T. & Hunger, D. (2000) Strategic Management and Business Policy.Eleventh edition.Pearson education, New Jersey.

Yahoo.com. (2011).Starbucks - Income Statement.Online at http://finance.yahoo.com/q/is?s=SBUX.

Appendix 1

Appendix 2

First Quarter Fiscal 2011 Summary

13 Weeks Ended

($ in millions, except per share amounts)

2-Jan-11 27-Dec-09 Change

Revenues $2,950.8 $2,722.7 8%

Operating Income1 $501.9 $352.6 42%

Operating Margin2 17.0% 13.0% 400 bps

Comparable Store Sales Growth 7.0% 4.0%

EPS3 $0.45 $0.32 41% 1 Non-GAAP operating income for Q1 FY10 was $370.9 million, resulting in a 35% change. 2 Non-GAAP operating margin for Q1 FY10 was 13.6%, resulting in a 340 bps change. 3 Non-GAAP EPS for Q1 FY10 was $0.33, resulting in a 36% change.

See the reconciliation of selected GAAP measures to Non-GAAP measures at the end of this document for further detail.

Appendix 3

Period Ending Jan 2, 2011 Oct 3, 2010 Jun 27, 2010 Mar 28, 2010

Total Revenue 2,950,800   2,838,000   2,612,000   2,534,700  

Cost of Revenue 1,200,800   1,172,600   1,076,200   1,064,100  

Gross Profit 1,750,000   1,665,400   1,535,800   1,470,600  

Operating Expenses

Research Development -   -   -   -  

Selling General and Administrative 1,154,800   1,181,600   1,098,800   1,028,800  

Non Recurring -   6,400   20,400   7,900  

Others 127,800   126,100   125,200   128,500  

Total Operating Expenses -   -   -   -  

Operating Income or Loss 501,900   399,300   327,700   339,800  

Income from Continuing Operations

Total Other Income/Expenses Net 14,400   21,900   (1,400) 4,700  

Earnings Before Interest And Taxes 516,300   421,200   326,300   344,500  

Interest Expense 7,900   8,600   7,900   8,000  

Income Before Tax 508,400   412,600   318,400   336,500  

Income Tax Expense 160,800   134,100   109,900   118,700  

Minority Interest (1,000) 400   (600) (500)

Net Income From Continuing Ops 381,100   326,900   244,200   251,700  

Non-recurring Events

Discontinued Operations -   -   -   -  

Extraordinary Items -   -   -   -  

Effect Of Accounting Changes -   -   -   -  

Other Items -   -   -   -  

Net Income 346,600   278,900   207,900   217,300  

Preferred Stock And Other Adjustments -   -   -   -  

Net Income Applicable To Common Shares 346,600   278,900   207,900   217,300  

Currency in USD.