RODRIGO BOQUIMPANI REZENDE

Capstone Project:

STARBUCKS CORPORATION - STRATEGIC

MANAGEMENT REPORT

Virginia December/2016

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BUSINESS STRATEGY

SUMMARY

EXECUTIVE SUMMARY.................................................................................... 3

1. INTRODUCTION ......................................................................................... 4

1.1. Industry analysis ................................................................................. 4

2. COMPETITIVE ANALYSIS ......................................................................... 5

2.1. Generic Competitive Position ............................................................ 8

2.2. SWOT Analysis .................................................................................... 8

2.1.1 External factors .................................................................................. 9

2.1.2 Internal factors ................................................................................. 10

2.3. Porter’s Five Forces .......................................................................... 11

2.3.1 Intensity of rivalry ............................................................................. 12

2.3.2 Threat of new entrants ..................................................................... 12

2.3.3 Bargaining power of suppliers .......................................................... 12

2.3.4 Bargaining power of buyers ............................................................. 12

2.3.5 Threat of substitutes ........................................................................ 13

3. STRATEGY ISSUES IDENTIFIED ............................................................ 14

3.1. Major strategic issue ......................................................................... 14

3.2. Strategic issues ................................................................................. 15

4. STRATEGIC PATHS ................................................................................. 15

4.1. The Grand Strategy Matrix ............................................................... 16

4.1.1 Market segment development strategy ............................................ 18

4.1.2 Product development strategy ......................................................... 18

4.1.3 Acquisitions and Alliances strategy .................................................. 19

4.1.4 Retrenchment Strategy .................................................................... 20

4.1.5 Premium pricing strategy ................................................................. 20

5. RECOMMENDATION: ACQUISITIONS AND ALLIANCES STRATEGY . 21

REFERENCES ................................................................................................. 24

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LIST OF FIGURES

Figure 1 – SWOT: Opportunities and Threats ................................. 9

Figure 2 – SWOT: Strengths and Weakness ................................. 10

Figure 3 – Porter’s Five Forces of Starbucks ................................. 13

Figure 4 – Grand Strategy Matrix ................................................ 13

Figure 5 – Grand Strategy Matrix: Quadrant IV ............................ 21

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LIST OF GRAPHS

Graph 1 – Coffee’s Market share in the United States in 2014 .......... 5

Graph 2 – Dunkin’ Brands revenues (in Million of Dollars) ................ 6

Graph 3 – Starbucks revenues (in Billion of Dollars) ........................ 6 Graph 4 – Starbucks’ acquisitions timeline ................................... 22

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EXECUTIVE SUMMARY

This work intends to create a strategic management report of Starbucks

Corporation, passing through the competitive analysis to identify the major

problem and give recommendations.

Starbucks Corporation is a major company that operates in the coffee

business since 1971. The company, which has placed itself as a supplier of the

experience of drinking premium coffees. Starbucks has significantly expanded its

presence during the past two decades and today the company is situated in 70

countries.

Starbucks apparently undisputed market leadership position can be

credited to the company’s clever product diversification and an acquisitions and

alliances expansion strategy. In response to changing consumer needs and

demand, Starbucks has evolved from a mere seller of coffee products to full-

fledged chain “restaurant”, offering not only coffee products but also other

beverages, foods, and merchandise.

Starbucks adopted the generic strategy of differentiation, the goal is to

make the company dissimilar from other competitors, emphasizing on the

Starbucks Experience and premium coffees.

Despite of the positive market position, the company faces challenges in

the short and medium terms. Those challenges emanate from the very way of

growth of the company and its competitors around the world. The analysis also

shows that Starbucks is well-positioned to confront expected changes in the

industry. The company is advised to continue key strategies on corporate level:

aggressive expansion strategy through acquisition and alliance primarily, product

development/positioning strategies for niche markets and retrenchment

strategies for unprofitable product lines.

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1. INTRODUCTION

Starbucks Corporation is a coffee company founded in 1971 in Seattle,

Washington. It operates more than 24 thousand retail stores in 70 countries

worldwide1, being the majority in United States fallowed by China, Canada,

Japan, South Korea and United Kingdom.

In the year of 2015, Starbucks employed around 238 thousand with a

revenue of US$ 19.163 billion (16.5% increase over 2014) and a profit of US$

2.757 billion (33.3% increase over 2014)2. It participates of Fortune 500 holding

the position of 1462.

Starbucks has been known for the premium quality of its coffee but their

product mix includes a range of other options beside coffee. They offered

handcrafted beverages, baked pastries, sandwiches, salad and grain bowls,

oatmeal, yogurt parfaits and fruits cups to say the more important ones.

1.1. Industry analysis

The company’s main operations rely on the industries of coffee and snacks

retail stores. Coffee is a major commodity and it plays an important role in the

global economy being the second most valuable traded commodity in the world.

In order to understand the commodity, it’s imperative to first comprehend

the agents of the economy that control this industry through an analysis: the

sections, the international trades and the leader countries.

There are three sections, per say, in this market: The growers, the roasters

and the retailers. Every one of them together make a chain of event that

separately can have its own articles given the depth of information, hence this

article will only mention to not unfocused the reader.

The import and export aspect of coffee’s industry is based on the daily

production. In 2011, 11 million hectares of the farmland in the world are utilized

for coffee farming3.

Brazil plays a major role in this industry and as the country leader in the

segment, Brazil holds the bigger production of coffee, followed by Colombia,

Vietnam, Indonesia and Mexico3. It’s important to understand that any

fluctuations that impact Brazil’s production will, in one way or another, affect the

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market globally. Fluctuations can be described as weather changing and

economic behavior as the willingness to buy.

Due to the economic crisis, the market suffered a significant slowdown in

2009. The United States’ revenue declined 6.6% to US$ 25.9 billion in contrast

of a decade of stable and consistent growth. The customers spent less money

eating out and drinking luxury coffee as consequence of the familiar budget4.

From 2008 to 2013, the industry had a very poor growth of 0,9% annual

but the forecast for the next five years showed a rate of 3.9% with a potential to

reach US$ 35.1 billion revenues in the US.

Starbucks leads the coffee segment with a market share of 42.40%

reported in 2014.23

Graph 1 – Coffee’s Market share in the United States in 2014

Source: Statista, 2014

As can be observed, Starbucks and Dunkin’ Brands together have almost

70% of the market, giving them a strong market power and presence that can

determine the ways of the industry.

2. COMPETITIVE ANALYSIS

This present analysis will describe the organization’s current competitive

position through three different approaches, conducting research and using the

most appropriate tools to clarify the argument.

But first, this work will report information about how Starbucks sees its own

strategy and some data about Dunkin’ Donuts to contextualize the process of

understanding.

42,40%

25,50%

32,10%

Starbucks Corporation Dunkin' Brands Inc. Others

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Since 1987, the premium coffee market has seen different, both in terms

of product variety and competitive rivalry. Different from early days, when

Starbucks had to compete against small-scale and local specialized coffee

retailers, the industry has now grown globally and Starbucks has to participate in

a competition against organizations with different dimensions and exposures.

The main competitor of Starbucks is a multinational company very well

stablished worldwide, Dunkin’ Donuts. Even though it’s very old in the fast food

segment, the company has just entered the coffee sector.

Dunkin’ Brands has 8,400 franchises in the US and 3,300 stores around

the world. In 2015 Dunkin’ Brands had revenues that excess of US$ 800

million5.

Graph 2 – Dunkin’ Brands revenues (in Million of Dollars)24

Source: Statista, 2016

Graph 3 – Starbucks revenues (in Billion of Dollars)25

Source: Statista, 2015

$516,94 $544,93 $538,07

$577,14 $628,20

$658,18 $713,84

$748,71

$810,93

$-

$100,00

$200,00

$300,00

$400,00

$500,00

$600,00

$700,00

$800,00

$900,00

2007 2008 2009 2010 2011 2012 2013 2014 2015

$9,40 $10,40 $9,80

$10,70 $11,70

$13,30 $14,90

$16,45

$19,16

$-

$5,00

$10,00

$15,00

$20,00

$25,00

2007 2008 2009 2010 2011 2012 2013 2014 2015

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According with the recent aim on the marketing side of Dunkin’ Donuts,

they are emphasizing the variety of type, styles and flavors in their line-up. In

2007, when Starbucks was suffering a problem with their baristas and had to

temporarily close 7,100 stores, Dunking Donuts have a quick response and

increased their daily operation through night offering small beverages with a price

of US$0.99, aiming grasp customers from Starbucks6.

The mission statement of Starbucks is “To inspire and nurture the human

spirit – one person, one cup and one neighborhood at a time.”, and their values

are7:

1. Creating a culture of warmth and belonging, where everyone is welcome.

2. Acting with courage, challenging the status quo and finding new ways to

grow our company and each other.

3. Being present, connecting with transparency, dignity and respect.

4. Delivering our very best in all we do, holding ourselves accountable for

results.

Starbucks also have a strong camping to advocate about being a

responsible company. For them, being responsible meaning have a balance

between profitability and social conscience, which are explained in three different

approaches8:

1. Ethical Sourcing: They take a holistic approach to ethically sourcing high

quality coffee. This includes responsible purchasing practices, supporting

farmer loans and forest conservation programs. When the company buys

coffee this way, it helps foster a better future for farmers and a more stable

climate for the planet. It also helps create a long-term supply of the high-

quality beans carefully blending, roasting and packing fresh for more than

40 years.

2. Environmental Stewardship: Share customers' commitment to the

environment. The company is telling that they are working to reduce their

environmental footprint through energy and water conservation, recycling

and green construction.

3. Community Involvement: They have a strong believe in fostering thriving

communities.

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2.1. Generic Competitive Position

Starbucks Coffee uses the broad differentiation generic strategy. In this

generic strategy, the goal is to make the company different from other

competitors. It is such difference that makes Starbucks stand out. The company’s

emphasis on specialty coffee easily differentiates Starbucks from many other

establishments that offer coffee.

For instance, Starbucks uses its sustainable and responsible sourcing

policy to differentiate its products from competitors. This generic strategy is also

manifested in the company’s culture. While competitors like McDonald’s and

Dunkin Donuts emphasize low cost, Starbucks Coffee emphasizes a warm

friendly ambiance that people enjoy.

An implication of the broad differentiation generic strategy is that

Starbucks Coffee must continue innovating to ensure differentiation in the long

term. This generic strategy could lose its strength when competitors also find

ways to stand out. To address this matter, Starbucks keeps innovating its product

mix and supply chain. In applying the extensive differentiation generic strategy,

Starbucks focuses on specialty ingredients and products, such as baked goods

that do not have high-fructose corn syrup. Starbucks also innovates its supply

chain to satisfy its generic strategy through a continuing search for the most

sustainable and finest ingredients. Consequently, based on this generic strategy,

Starbucks Coffee’s strategic objective is to differentiate products and its supply

chain.22

2.2. SWOT Analysis

For measure of the company’s performance, it’s necessary to do a properly

assess of it. One of the ways to achieve this is through a SWOT analysis

comprehending both external and internal scenarios of the company.

The “O” stands for Opportunities as “T” stands for Threats, these two

sectors represent the External competitive environment of the firm, and will be

the initial part of the SWOT analysis.

The next sectors represent the internal firm capabilities. The “S” stands for

Strengths and “T” for Weakness.

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2.1.1 External factors

Figure 1 – SWOT: Opportunities and Threats

Source: Author's own figure

1. Starbucks does have many retail stores across the globe, but the majority

of them are located within the United States9. Therefore, there are several

locations possibly profitable, including emerging markets like India and

China, others where the firm currently has minimal presence like Central

Europe for instance is equally significant.

2. Starbucks have expanded its product mix by venture into the tea and fresh

juice through a smart acquisition strategy13.

3. The expansion of the product offerings by Starbucks can take advantages

from food and beverage retailers, like Burger King, as the segment

expanding10 and possibly leading to more business opportunities to be

explored through partnership and alliances by Starbucks, strengthen its

competitive position.

4. The rising prices of coffee beans is a serious threat that the company is

facing in current days11. The scope includes supply chain risks related with

fluctuations in the prices, consequence of a some global or a local

condition.

5. Starbucks is facing a rough contest when it comes to compete against

local coffeehouses12. Whatever the difficulties are, from a loyal clientele or

people with disgust for big brands.

6. Starbucks has been fighting against lesser-known rivals who wish to

attached on its success14. The company is affected with trademark and

copyrights infringements globally.

OPPORTUNITIES

1. Expansion to emerging

markets 2. Expansion of Product Mix 3. Partnership with food industry

THREATS

4. Price of coffee beans 5. Local coffeehouses intense

competition 6. Trademark and copyright

infringements

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2.1.2 Internal factors

Figure 2 – SWOT: Strengths and Weakness

Source: Author's own figure

1. Starbucks has a very well consolidated presence worldwide and 37% of

market share in US, it operates in over 60 countries and they have the

coffee brand most recognized ranked 64th in the best global brands of

201615. Starbucks explored this position by merchandizing products,

licensing the company’s logo and facilitating entering international

markets.

2. The core of the company, its highest quality products, have an important

role in the market strategy and positioning. Starbucks avoid

standardization even for higher production16.

3. Starbucks aims for its locations places with premium atmosphere, high-

traffic and high-visibility such as downtown centers, office buildings,

university campuses and select off-highway across the World. The stores

have a unique appealing and customers quickly link the ambience with a

standard quality that can be founded in every Starbucks stores17.

4. Given the numbers of places that Starbucks operates, it’s reasonable to

say that the volume of its transactions is high enough to obtain scale gains,

which allowed them to be more aggressive in its premium products price.

5. Starbucks differentiate their products with being highly quality and they

come with the Starbucks experience, but when economical difficult times

arrive, customers switch for a less premium coffee to fit the new budget.

This kind of scenario is common in developing countries.

6. Starbucks generates an enormous percentage of its total revenue from the

United States what make them overdependence of US market and

sensitive for its fluctuations.

STRENGTHS

1. Global brand recognition. 2. Aesthetic appeal of

stores. 3. Premium products. 4. Economies of scale.

WEAKNESS

5. Relative expensive

products. 6. Dependence of US

market. 7. Generalized standards

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7. Starbucks has been suffering for lacking researches when it goes

international. The majority of its products is standardized, which make their

products less aligned with the cultural demands in some countries. For

instance, Starbucks has had to close down some locations in Australia

because the concept of their coffee is different from those applied by

Starbucks18.

2.3. Porter’s Five Forces

Michael Porter, a Harvard’s professor, developed this method in 1979 to

analysis key factors of a company’s external environment.

Porter's Five Forces helps to explain why different industries are able to

sustain different levels of profitability. This model was originally published in

Porter's book, "Competitive Strategy: Techniques for Analyzing Industries and

Competitors" in 1980. The model is widely used, worldwide, to analyze the

industry structure of a company as well as its corporate strategy. Porter identified

five undeniable forces that play a part in shaping every market and industry in the

world. The forces are frequently used to measure competition intensity,

attractiveness and profitability of an industry or market.

The five forces are: Intensity of rivalry, Threat of entry, Bargaining power

of suppliers, Bargaining power of buyers and Threat of substitutes.

Intensity of rivalry is the key capability for certain competitors operate in the

market.

Threat of new entrants is the level of how determined profitable markets

can attract new entrants.

Bargaining power of suppliers is an assessment of how easy it is for

suppliers to drive up prices.

Bargaining power of buyers is an assessment of how easy it is for buyers

to drive prices down.

Threat of substitutes occur when close substitute products exist in a

industry and the likelihood of clients swapping to alternatives in response when

price is increased.

Starbucks Coffee faces the impact of the five forces as delineated in

Porter’s model. These five forces differ when comes to its intensities, based on

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the information presented in this study, only the Bargaining power of suppliers

represents the least concern for the company.

The Five Forces of Porter for Starbuck was built upon data and information

founded freely on Internet and articles alike.

2.3.1 Intensity of rivalry

Large number of companies (strong): Starburks has the largest markets

share and Dunkin’ Donuts also has a significant market share, generating

substantial pressure on Starbucks.

Low switching cost (strong): It’s easy for customers to shift from Starbucks

do other companies, practically with no cost.

2.3.2 Threat of new entrants

The barriers that supposedly have the goal to discourage new competitors

aren’t high enough.

Cost to entry (moderate): The initial investment isn’t significant. The

entrepreneur can lease stores, equipment etc.

Retaliation (high): Well-established brands have the power to take this kind

of action due to brand equity, localization and price.

2.3.3 Bargaining power of suppliers

Low cost of switching (weak): The large overall supply lessens the effect

of any single supplier on the company, which means the Starbucks’ beans

coffee grown in regions that have this as standards inputs.

Diversify (weak): Starbucks has the policy of diversify its supply chain with

the goal of reduction the influences on the business.

2.3.4 Bargaining power of buyers

Diversification (weak): There are several different buyers in this business

and no one can demand price concession.

Low consume (moderate): The industry offers vertically differentiated

products with a diverse consumer base, which make relatively low volume

purchases, which erodes the buyer’s power.

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2.3.5 Threat of substitutes

Other beverages (strong): There are several substitutes for the coffee, for

instance tea, fruit juice, water etc. Other places such Pubs and bars could

also replace the social experience of Starbucks.

Do it yourself (strong): Consumers could also make their own coffee with

household premium coffee makers at a fraction of the cost for buying from

premium coffee retailers like Starbucks.

Figure 3 – Porter’s Five Forces of Starbucks

Source: Author's own figure

Starbucks Coffee faces the influence of the five forces, as outlined in

Porter’s model.

Intensity of rivalry (strong)

Threat of new entrants (moderate/strong)

Bargaining power of suppliers (weak)

Bargaining power of buyers (weak/moderate)

Threat of substitutes (strong)

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Starbucks Coffee has a variety of challenges linked to these five forces,

the company must ensure effective measures to prioritize intensity of rivalry,

threat of new entrants, and the threat of substitutes.

3. STRATEGY ISSUES IDENTIFIED

3.1. Major strategic issue

The major issue that Starbucks is dealing strategically is related with

growth and, at same time, maintains its principles that lead them to success.

The growth is making the stock price soar30, and Starbucks is doing

everything it can to keep it going. The company's primary strategy is to revise and

expand its food and beverage menus to draw in customers during lunch and early

evening. Although the plan has enabled U.S. stores to keep growing, it has three

vectors that could have a negative impact on growth and profitability.

The first one is that no company can be all things to all people. Starbucks

is no exception. Over 2013, Starbucks added new gourmet sandwiches, renewed

its push to sell alcoholic beverages, and is stocking Teavana tea and craft soda

in its coffee shops. People think of Starbucks when they think of coffee, but it can

become a problem if extend this period for more ten years. Costumers might have

problem to identifying Starbucks as a coffee shop.

The second is related with the abundance of choice of Starbucks'

expanded food and beverage menus. A Columbia University study28 found that

people were more likely to make a purchase when offered six choices rather than

30 choices. Participants in the study were also more satisfied with their purchases

when they selected from fewer options.

The third was when Starbucks adds several layers of complication to its

supply chain and employee training by buying29 and introducing La Boulange to

its stores just for shutdown it in 201520. In December of 2013, Lutz30 wrote an

article illustrating how difficult it is to deliver an order that includes both food and

beverages when your store is designed to sell coffee. The author discovered that

miscommunication between employees preparing food and those preparing

beverages led to incorrect orders or orders not being filled at all. When you add

in the logistical complexities that come with expanding store inventory and the

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new routines required to prepare gourmet food, Starbucks' expanding menu

could easily lead to problems in execution.

3.2. Strategic issues

Another challenge that Starbucks has is regarding of its competitors. There

are several coffee shops all over the world with a similar, if not identical concept

(New World Coffee, Timothy’s, etc.) and being able to stand out to generate

customers.

Starbuck coffees have their price higher than other market competitors

because of “Starbucks Experience” and because of their policy of only purchasing

premium quality coffee beans, thus increasing the price of the drink to meet

expectation, and because of that giving the competitors a cost advantage over

Starbucks.

The severe expansion strategy followed by Starbucks can take a toll on

the firm’s brand image. As companies grow, they tend to focus too heavily on

increasing output and locations, and less focus on quality and brand image21.

Also, Starbucks policy of not franchising can be a cause of concern for the firm.

Franchising would allow the company to open many new stores with less risk,

and make considerable profits in doing so.

4. STRATEGIC PATHS

In this section this work will present several strategic ways that Starbucks

can pursuit to address those three strategic issues together, previously identified.

Along with it will be also describe the pros and cons of each strategy.

Starbucks has to effectively continue to growth by pursuing a focus-based

strategy in differentiation combining with acquisitions to tackle the three strategy

issues.

The differentiation, it so called “Starbucks experience”, is a core element

in the whole history of Starbucks and it’s the way that costumer identifies the firm

in their mind.31

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4.1. The Grand Strategy Matrix

The Grand Strategy Matrix will be applied to determine which strategies

are most appropriate for each category on the basis of competitive position and

market growth.

Figure 4 – Grand Strategy Matrix

Source: Strategic Management Report - A Strategic Pathfinder for STARBUCKS

Products that have a strong competitive position and experience rapid

market growth fall into quadrant I. For Starbucks, such products are typically

beverages and foods that enjoy a high acceptance among customers. Examples

are the Frappuccino and the Panini, but also juices and teas (e.g. Chai). In order

to consolidate the market position and boost growth, Starbucks needs to further

develop those product categories. This can be done by adding flavors,

ingredients, or temperature. Starbucks has already applied this strategy on

domestic scale by introducing the Caramel Ribbon Crunch Frappuccino blended

beverage or the Vegie Panini.

Products that have a weak competitive position and experience rapid

market growth fall into quadrant II. For Starbucks, product lines such as the K-

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Cup and VIA instant coffee are good examples. Having missed out on the first-

mover advantage, such products have to quarrel with strong competitive brands

(e.g. Nestlé). Hence, their competitive position is weak yet fast market growth

rates in the single-serve coffee sector make them highly profitable. It is therefore

important to further develop the market by redirecting financial resources and

R&D capabilities to making niche products more attractive in the eyes of

consumers. Marketing campaigns that highlight product qualities or appearance

make-overs are possible options to better the competitive position of such

products and turn them into stars.

Products that have a weak competitive position and experience slow (or

no) market growth fall into quadrant III. Being portrayed as dogs in the BCG-

matrix, such products are merchandise and traditional coffee-making equipment.

Possible strategic alternatives are therefore retrenchment and even complete

liquidation of product lines. The retrenchment alternative suggests slimming

down the merchandise offering, only keeping items with positive sales figures

(e.g. stainless coffee mugs and tumblers or Verismo Machines) and getting rid of

unprofitable product lines (e.g. music CDs). Liquidation suggests offering no

merchandise and solely focus on selling beverage and food products.

Products that have a strong competitive position and experience slow

market growth fall into quadrant IV. For Starbucks, an example would be the

classical ground and whole bean coffee with its different blends. Ground and

whole bean coffee have been around almost since the foundation of the

company. Customer have been buying traditional coffee for decades and

Starbucks’ ground and whole bean coffee products enjoy a high reputation

among customer due to their high-quality image. However, over the past years

sales of traditional coffee have stagnated due to the appearance of single-serve

coffee products and changes in consumer needs. What Starbucks could do to

boost sales of traditional coffee products is to form strategic alliances with large

restaurant chains, hotel chains, or specialty and premium retailers that sell

freshly-brewed coffee to customers. This retail strategy has already been

successfully applied in the early stages of Starbucks’ expansion and needs to be

further developed to boost sales of traditional coffee products. The company has

shown that customers still value good service, high quality, and a cozy store

atmosphere and that they are willing to pay an extra price to feel “special”.

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Especially in emerging markets, pushing for market share by cutting prices is a

losing strategy as new entrants can never “outcut” the prices of local competitors.

4.1.1 Market segment development strategy

Starbucks should apply a market segment development strategy for niche

markets in developed economies, in particular, the single-serve, courtesy and

flavored coffee segments. Those segments portray positive growth rates and

must be exploited if the company plans to increase market shares in established

markets.

Pros:

Helps focus your marketing efforts.

Set more specific and measurable goals

Creates different, more suitable content for each segment

Cons:

Can be expensive and It takes research to survey customers and define

segments.

Time-consuming. Market segmentation entails developing customer

profiles and personas from the research data, and that takes time away

from potentially more pressing tasks.

Can miss important customers. A significant consumer segment may fall

through the cracks.

4.1.2 Product development strategy

On business level, the company is advised to further develop successful

product lines (Frappuccino, Paninis) so that they do not loose attractiveness in

the eyes of customers. Starbucks also has great growth potential in Tea and

Fresh Juice products, and the company is advised to build up those product lines

alongside their core coffee and food products. But they must have in mind that

many options on menu might play against them, a more simple and effective

menu can increase further incomes.

Pros:

By improving the performance of existing beverages, competitors probably

won't match the new level of performance.

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Increase revenue or profit by charging higher prices for a superior product.

Cons:

Between 50 and 80 percent of new product programs fail.32

When the team is generating ideas, it may not carry out sufficient research

into market requirements, leading to developments that do not meet

customer needs.

4.1.3 Acquisitions and Alliances strategy

Growth in this segment can be revived by forming alliances or acquisitions

with key strategic retail partners (e.g. Tata Group or Kraft Foods) who dispose of

the necessary market spread to distribute traditional coffee products.

Pros:

Learning the necessary skills and obtain certain capabilities from your

strategic partner.

Reducing costs and risks by distributing them across the members of the

alliance.

Joining with your rivals to cooperate instead of compete.

Adding value to the combined entity by eliminating redundancies and

increasing overall revenues.

Acquiring existing technologies, business processes and employees,

which would otherwise be extremely expensive to develop on your own.

Cons:

Require the sharing of resources and profits.

Require the sharing of knowledge and skills.

Create a potential competitor. An ally one day may become a competitor

the next when it decides it no longer needs of the alliance.

Possible clashes between your corporate culture and that of the company

you intend to buy.

Apprehension among both your employees and those of the company you

acquire. These employees may feel that their jobs may be in jeopardy

during a consolidation.

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4.1.4 Retrenchment Strategy

Starbucks should consider slimming-down unprofitable product

categories, such as merchandise and traditional coffee equipment. This will free

up additional financial resources which is necessary to further drive the extension

of profitable and currently “hip” product lines. A liquidation strategy for the entire

merchandise category is not recommendable as certain products still enjoy high

demand among customers (e.g. tumblers and Verismo machines).

Pros:

Improved Efficiency. The employees are going to be on their best behavior

once the retrenchment has been placed, even if the downsize will only

focus on products.

Cost Savings. Mergers and acquisitions lead to duplication of support staff.

Changes in technology lead to obsolesce of product or service lines. All

these things create excess workforce with no work, and a retrenchment

strategy allows organizations to respond to such changes and protect

profitability.

Cons:

Regardless of the merits, downsizing results in disruption of interpersonal

relationships at work, both formal and informal that have taken root over

the years.

4.1.5 Premium pricing strategy

It is advisable to aggressively expand the number of stores at home and

abroad in order to not fall behind competitors, who, based on their low-cost

advantage, are able to attract more customers particularly from the fast growing

and highly coffee-conscious middle-class in emerging economies. Aggressive

expansion does not mean undercutting competitors. On the contrary, Starbucks

should hold on to its high-quality image. Lowering prices would most likely

mediocritize Starbucks’ excellent brand image and reputation as a provider of

premium coffee and exceptional service.

Pros:

Competitors Advantage. Investing resources and using the right

advertising strategies to correctly promote the Starbucks brand’s

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premium products is a great way to gain the upper hand in

competition.

Increasing of the barrier to enter. it will make harder for other

companies to enter the market and compete with the same

strategies and ideas.

Increased visibility by raising the product awareness using prestige

pricing.

Improved profits.

Cons:

The cost of effective marketing is a serious premium pricing

drawback. If Starbucks isn't eager to invest sufficient funds, it’s

impossible to create a premium brand image.

Sometimes, image pricing limits our customer base, shrinks it and

eventually, decreases annual income.

5. RECOMMENDATION: ACQUISITIONS AND ALLIANCES STRATEGY

Figure 5 – Grand Strategy Matrix: Quadrant IV

Source: Strategic Management Report - A Strategic Pathfinder for STARBUCKS

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Since its foundation in 1971, Starbucks has acquired or formed alliances

with a number of companies. The most prominent acquisitions of Starbucks

include the purchase of Tazo Tea Company in 1999, which allowed Starbucks to

add various tea products to its portfolio, the Seattle Coffee Company in 2003,

which further expanded Starbucks’ presence in the US coffee market and also

opened the way into the wholesale sector, and the Coffee Equipment Company

in 2008, which granted Starbucks the right to use the innovative Clover Brewing

System.

Key alliances include the partnership with Target, which allowed Starbucks

to sell its coffee in highly frequented cafés in Target Stores, the Green Mountain

Coffee Roasters, providing Starbucks with access to the fast-growing single-

serve coffee market, and Tata Coffee of India, which will lead to Starbucks

gaining a threshold in the aspiring Indian coffee market and also providing the

company with access to high-quality Arabian coffee beans. Acquisitions and

alliance can therefore be seen as important measures to diversify the product

portfolio (e.g. Tazo Tea), gaining market share (e.g. Seattle Coffee Company),

penetrating new segments (e.g. Green Mountain Coffee Roasters), gaining

access to intellectual property (e.g. Coffee Equipment Company), and expanding

into new markets (e.g. Tata).33

Graph 4 – Starbucks’ acquisitions timeline

Source: Starbucks Company37

In 2013, Starbucks began to expand its presence into the coffee farming

industry, enabling it to manage the supply chain, ensuring that the coffee beans

are of the highest quality34. If Starbucks is able to generate a profit through

farming, they are hedging against the volatility of coffee bean prices through self-

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production34. One advantage of Starbucks initiating this process of vertical

integration is that they can use their farms to grow coffee beans of higher value,

allowing them to save a lot of money and making higher profits34. Additionally,

the coffee beans that Starbucks’ farms produce have an immediate market, their

coffee shops, which already price their coffee at a higher price than the

equilibrium price that is generated by the futures exchange34. A further analysis

of Starbucks’ vertical integration strategy demonstrates that Starbucks utilized

backwards vertical integration through: purchase agreements with coffee

growers, company owned bean roasting plants, company owned warehousing

and distribution facilities and through the purchase of coffee bean farms in Costa

Rica and China35. By doing this, Starbucks took on a lot of risks, as it introduces

more complexities into its business structure, through additional capital

acquisition and an increase in the number of employees.36 However, these risks

are outweighed by the benefit that Starbucks reaps through achieving its main

goal of maintaining high quality throughout the value chain35. In the future,

Starbucks is expected to utilize alliances and acquisitions to spur expansion in

emerging markets.33

Acquisitions of direct (e.g. Seattle’s Best Coffee Company) or indirect

competitors (e.g. Tazo Tea or Teavana) helped Starbucks to level the competitive

landscape and diversify its product portfolio.

With new products being added to the existing brand portfolio, it is inevitable for

Starbucks to penetrate new market segments through acquisitions. The

acquisition of Hear Music allowed the company to play and sell “hip” music in its

stores. Starbucks also entered the bottled water market by acquiring Ethos water.

While the latter two acquisitions portray two markets that have little to do with

coffee, Starbucks also kept track of hot trends within the coffee market. For

example, the alliance with Keurig allowed the company to deliver K-cups to the

fast-growing single-serve coffee segment. By signing a deal with Courtesy

Products, a provider of in-room coffee service in hotels, Starbucks is further

advancing its position in the luxury coffee segment. This alliance will allow the

company to cater its instant coffee to as many as 500,000 luxury hotel rooms in

the United States.38 The right implementation of the acquisition strategy will bring

Starbucks closer to becoming a full-fledged chain restaurant.33

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