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BUSI1271: Global Strategy: Analysis & Pr Starbucks N Brady, WE Hearne, VJ Torlo

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BU/PG 70.00% 10/01/2012

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Individual Case Analysis - Starbucks

ARIFUR RAHMAN KHONDOKAR STUDENT I.D. 000697896 BUSI-1271, Tut/01-02 TUTOR VANINA TORLO M.B.A INTERNATIONAL BUSINESS

Executive Summary
Starbucks is world famous brand in coffee industry. The main objective of the company is to bring new innovative product to customers in a prominent location. This report focuses on critical analysis on coffee industry based on external analysis and Starbuckss internal analysis. Moreover, it also highlighted on core competencies, BCG matrix, Ansoff matrix, critical success factor of the company and an overall a few strategic suggestions for future.

About Starbucks:
Starbucks was founded in Seattle, USA at 1987. Today it is world class premier roaster and retailer of premium brand coffee. The company is operating 8812 company owned store and 7852 licensed store in 50 countries in the world. During 2010, the annual revenue was $10 billion.

Strategic Appraisal of Starbucks

External Environment Analysis: Coffee Industry PESTEL analysis on global context:
PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal. It is also called as STEEPLED which includes two additional character Ethics and Demography. This is an external environmental analysis which can be (or) can not be controlled by an organization. The PESTEL factors are sometimes useful for business but also can have negative effect (Kotler & Armstrong, 2009) Political: A stable governments and political situation is very important to attract the investors in coffee industry. Most of the coffee producing countries are in South America and Africa where political situation is not stable. This can affect the supply chain of coffee (Caliendo, 2010) In addition, global companies are affected by Trade regulations by trading blocks like G-20 and CAIRNS Group. Economic: In many coffee manufacturing countries cultivation has intensified the level of poverty and economic inequality due to the fluctuation of the coffee prices. In 2002, inflation adjusted coffee prices dropped 100 years low (Roberto,2008) Even though world coffee industry has become more globalized but, still it is more informal and unstable. The industry is still dominated exclusively by the forces of demand and supply. (Allison, 2009) The coffee market is highly influential with price fluctuation. According to economists, it is a combination of inelastic demand and inelastic long-run supply. If we think of the supply, the roasting industry has become consolidated and productivity increased from large producers in Brazil and Vietnam has decreased the power of other producing countries like Nicaragua, Columbia (or) Costa Rica. Other hand demand is

more or less flat. That is why economists are predicting a cycle of boom and bust in future. (Roberto, 2008) Social: Different parts of the world have different kind of taste. In USA or Italy has a passion for coffee whereas in India (or) China still prefer tea. So, the companies have to act according to the taste of the consumers (Bell, 2005) Again, modernization of original coffee (or) tea changes the plans of the companies now. The manu board is full of different flavours like cappachino, frappe, latte, americano, chai, flaovered tea etc. People are more concered about the Fairtrade coffee/ tea due to the campaign of social media. Organic tea/coffe is also an important factor now as people are more health concerned now. Now, the medical science is also pushing us to cut-off the quantity of caffein. Thats why De-caffinated has been introduced for healthy drinking plan. Technological Social networking sites, media and even mobile technology have been advanced so much now a days and every information is available on Apps now (Allison, 2009) Coffee making technology has been advanced now a days and companies like Costa (or) Starbucks use the most updated machineries to serve as quick as possible. Companies like Starbucks now days introduced pre-pay cards so that, people can avoid queues in peak hour. Environmental: NGOs constantly create pressure on businesses to change their practices. This influences the businesses and such measures usually impact the goodwill of the firm and help them to do the sustainable business. Fair-trade (or) saving rain forest (in South America) campaigns are the best example of environmental factors (Brian, 2010). Legal: The ICA (International Coffee Agreement) was an agreement by International Coffee Organisation members (ICO) members to put up an indicator price for the coffee. As an example, the target price was from $1.20 to $1.40 per pound. This institution also set quotas for export. About 90% of the coffee import and export was done according to the treaty. But, After the International Coffee Agreement has melted in July 1998. It has adverse effect on millions of coffee growers worldwide (Bell, 2005)

5 forces analysis of Coffee industry:

The threats of new entrants or barriers to Entry: In the present world coffee is a very popular drink and more people (or) companies would like to get into the business. But, if the farmers do not get enough funds, then they will not survive and new strong firms would enter. So, threat is high. It is also hard for small companies to enter into the industry as big firms like Starbucks (or) Costa had made the competition harder to enter. But, on other hand big firms like Coca-cola (or) McDonalds can easily enter (Allison, 2009) It means the entry is highly competitive unless the firms are very big .Here threat from low profile companies are Low but, from big firms are high (Adamy, 2006) The bargaining power of suppliers: In coffee industry the power of the suppliers are very limited and weak. Most of the suppliers coming from developing countries, they always do not have enough funds to position themselves in a bargain situation where they can increase price. The big companies sometimes agreed to pay them fair amount of price (Fair Trade) but, still the power of the seller depends on their government and financial situations. So, we can classify it as low (Global Data, 2010). Current Rivals: Still in many Asian countries tea is the main drinks and still the big companies are convincing enough to make the habit among the consumers to drink tea. But, in Europe and USA the situation is opposite. So, rivalry in coffee industry depends on geography and culture among the common people. So, competitors point of view it is High competition. Bargain Power of buyers In coffee industry, customers are in a better situation. We can classify the customers in two categories. One is the companies like Starbucks who buy from local suppliers and another one is the common people who buy from coffee shop. Big companies always paid to suppliers according to their rate though some are agreeing with fair trade now. Other hand, customers in coffee shop wants better service and they expect more from the companies like Star bucks. It is easy for them to move from one shop to another shop without restrictions. In both cases, customers bargain power is high (Associated press, 2008) Substitute Products
There is a lot of substitute product of coffee like tea, hot chocolate, cold coffee etc. Again, classic coffee has substitutes like cappuccino, latte, Americano, frappe etc. So, it is very important to maintain the standard of coffee in coffee bars like Costa (or) Star bucks. Culture is a factor here and obviously it depends on the taste of the customers where they can decide easily which product they want (Garza, 2010) so, the risk of substitute product is High (or) some cases it is medium.

Position of Starbucks:

High PRICE QUALITY

Low

Low

Low In the coffee industry Starbucks has been positioned as a premium product. Starbucks has done this by making high quality standard, introducing innovative products and giving outstanding service (Fortune, 2011).

SWOT analysis based on External Environment:

Useful Harmful Opportunities Threat

External (Macro) Internal Strengths Weaknesses (Micro) In this case we would do the external environment on the coffee industry and would find out the opportunities and threats.

Opportunities:
Coffee Development Projects: Coffee development projects are one of the important projects on International Coffee Organisations (ICO) and other organisations which work for the wellbeing of the farmers and their firms. Speciality coffee: Speciality coffee market is a potential factor now as the demand is increasing day by day. It includes different type of coffee like beans, roasting, brewing and types of coffee making like- cappuccino, latte, frappe, Americano, shots, cold coffee etc. This will bring more opportunity for development. Organic coffee: A hot topic on coffee industry is organic coffee. The demand on organic coffee is growing day-by-day.

De-caffeinated coffee: Decaffeinated coffee is less risky in terms of health as it has less caffeine. So, it could be a new field of opportunities for growers. Fair Trade: The most significant revolution in the coffee industry is possibly fair trade. It will help the growers to get fair market rate value of their products and that would safeguard them for future production. Most of the big firms now are signing up for fair trade and they are committed to pay the best value of their product. This is probably being the part of their corporate social responsibility.

Threats:
Competition from other crops on land: Due to the hard economic situations, the farmers might be tempted to grow different type of corps apart from the coffee. Political and economic situations: The coffee producers are mostly located in South America, Africa and South-east Asia where political situation sometimes become rough which discourages the investors to invest on the industry. Also, as the industry is highly depended on cross border trade so, the relation at government level could also be a threat. Lack of the training and technology: Due to poverty, growers do not have access to modern training and technology. Lack of Credit: Due to the lack of credit, the farmers cannot hold the crop for longer period and sell the product prompt to agent middlemen in cheap price Inadequate research and availability of info to farmers: Being 2nd biggest industry in world, it has not get enough attention as the other industries are getting like oil (or) car. There is still a lack of research facilities on this sector.

Internal Environmental Analysis:

Core Resources (essential material/goodwill) 1. Starbuck sells finest quality coffee. 2. The company has goodwill and they always try to maintain it. 3. All Starbuckss store ambience is based on customer taste and it is with high standards. 4. Locations of the stores are perfectly accessible by customers. 5. Starbucks always adopt new product. Core Competencies (essential capabilities) 1. The companys initial directors had an expert knowledge about coffee. 2. Very professional about customer service. 3. Starbucks CEO is very Knowledgeable about the industry 4. Employees are knowledgeable and passionate about coffee. 5. Building good relationship with local real estate representatives as they can help them to find the best suitable place. Distinctive Competencies (Additional) 1. Employee management relationship is very good. They can also convey their opinion in decision making. 2. Pay structured price to supplier. So, they also care about suppliers. 3. Starbucks believe Customer should find their 3rd place here in coffee shops after home and workplace.

Distinctive Resources (Additional) 1. Starbucks use different type of coffee, snacks in its product line. 2. Stock is preserved in scientifically way so that, it does not get moisture inside. 3. Store design theme is according to the history/culture of that area. 4. They follow Sustainability in business operation. 5. They have changed their core business operation from roasting bean to hot coffee.

Value Chain Analysis:

Primary Activities:
Inbound Logistics: Starbucks has its agents who travel regularly to different coffee producing countries to build a relationship between growers and buyers. In sourcing with green coffee beans, it deals directly with farmers. It usually pay high price to poor small coffee growers to make sure it covers their production cost and they can also maintain their families. Operation: They expand their market through number of channels like licensing with reputable and capable local companies like SSP in UK. Additionally, the company has a blanket expansion policy in major metropolitan area even though sometimes it becomes competitor with its own stores locally Outbound Logistics: From 2010, Starbucks manage its distribution by Consumer Products Group (CPG) who is responsible to sell selection of teas and coffees to craft, Pepsico, Unilever and other companies through an agreement.

Marketing and Sales: Starbucks spend little money in advertising. It spread its fame through mouth to mouth by creating a seductive atmosphere for customers which they believe should be customers 3rd place after home and workplace. In terms of sales the company is growing as we can see in the case study page c-342. Only during 2009 the sales was down. But, it is because of the world economy downturn. Service: Starbucks service is very well standard. They create store atmosphere to suits with customers preference and they give value for every sales they make through providing pre-pay card to avoid queue and incentive scheme.

Supporting Activities:
Firm Infrastructure: Initially the company was formed with few stores. But, today it is operating with 50 countries as world leading premium coffee retailers. The company has its own stores and licensed stores and all the staffs gets same type of training as the home store staff gets. Human Resources: Starbucks HR policy is very effective. Once the companys all majority staffs in USA did vote to come out of Union. The CEO is determined to make a skilled workforce to give best customer service. Staffs have health care coverage, stock purchase plan, proper training and recognition etc. Technology Development: All the new stores are equipped with computer by which they can see their costs involved. They also use one-way packing system which prevents air to get in and spoil the coffee freshness. Procurement: One of the core competencies of Starbucks is they will open in a premium location and they maintain very good relation with local real-estate agents as they get the best place to open. Starbucks opening strategy is so aggressive and sometimes their two stores in same area becomes competitor to each other.

Generic Strategy of Starbucks

There are four generic strategies: Cost Leadership, Differentiation and Cost Focus and Differentiation focus (Gamble, 2011) Starbucks is not cost leader in market as they are premium coffee retailer but, definitely in cost differentiation. The company does not do advertising and do not have any R&D department. They target wealthy and educated customer group who will not only come here to have coffee but, to spend quality time. So, they follow focus generic strategy (Caliendo, 2010)

Bowmans Strategy Clock:

The strategy clock was developed by Bowman & DAveni & based on Porters concept of generic strategy. It assumes that competitive advantage can be achieved if we provide customers what they want. It says that, customers will buy in case there is a combination of price and perceived product/service. It gives 8 distinctive generic strategy which looks like a clock. This gives rise to 8 distinctive generic strategies which may be illustrated as points on the face of a clock

If we locate Starbucks position in this clock, it will certainly located in differentiation and focus differentiation category.

Critical Success Factor analysis of Starbucks:

1. They should keep purchasing high quality coffee. 2. Balance between domestic and international growth. 3. Balance Company owned and licenced stores. 4. Monitor Global expansion (Associated press, 2008)

Financial Analysis:
Total net revenue Cost of Sales 2009 In billion 9774.6 4324.9 2008 In billion 10383 4645.3 2007 In billion 9411.5 3999.1

Gross Profit Margin: (Revenue - Cost of Sales)/Revenue Total operating income Operating Profit/ROS: (Operating income/Revenue) Profit after tax

56%

55%

57%

562 5.75% 390.8

503.9 4.85% 315.5

1053,9 11.20% 672.6

Net Profit Margin: (Profit After Tax/Revenue) Current Asset

4%

3.04%

7.15%

2035.8

1748

1696.5

Current Liabilities

1581

2189.7

2155.6

Current Ratio: (Current asset/Current liabilities) Working Capital (Current asset-Current liability)

128.77%

79.83%

78.70%

454.8

(441.70)

(459.10)

Comments: Looking at the financial ratios we can say Starbucks has a healthy growth. But, the company was not doing well during 2008/09. But, later at this case study, it was showing that the company is recovering again after the Global economic downturn.

SWOT analysis
Strengths Starbucks is diverting their product in tea, cold coffees, mineral waters, ice creams, snacks, lunch deals etc. It is a well-developed brand with reputations and goodwill in whole world. All the Starbucks stores are located in prominent easy accessible location. Staffs are knowledgeable and well-motivated and well trained They pay best price for the coffee to their suppliers The brand is financially sound They maintain sustainable operation in every stage of their operation.

Weaknesses Prices of the products are very expensive Focusing on expansion is too much and internal focus is very limited Large numbers of growing competitors in developing market like Costa, McDonalds etc. Size of the stores is sometimes too congested Only focusing a certain group of customers, but not everyone in the society

High overheads due to the prime locations

Selection of Strategic options:

Reflection of SWOT; How to uses the strengths to exploits the opportunities: Price: There is a huge demand of coffee in the whole world. Starbucks need to use that opportunities by taking the cost leadership in the whole world. They need to innovate new technologies and ways to reduce their overheads. More product line: Though the company started their journey with coffee, but they need to create huge product catalogue with the mixture of culture and taste in different countries. Example: If they open a branch in Bangladesh, they need to add Lassi (or) Faluda in their product line which is very famous in that country. Own Firm: Now it is the time for them to integrate their entire suppliers by lease holding process. Then only they can avoid (or) control sudden price increase.

BCG Matrix:

High High

Medium

Low

?
Backward-Forward Integration Horizontal Integration Market penetration Market development Product Development Market penetration Market development Product Development Divestiture

Medium
Product Development Diversification Retrenchment Divestiture Retrenchment Divestiture Liquidation

Low

The BCG matrix helps to maintain portfolio for multidivisional business by investigating the market share position. In addition, it helps the company to devise strategies (Luther,2011) It is signposted by four different characters from high to low. We can put Starbucks as Star where high industry growth rate and high market share rates are associated. We will not mark it as cash cow as it refers to high market share rate in low growth industry (or) as a star as it is not low market share rate in a high growth industry. Definitely not as a dog where there is low market share in low growth industry (Kanji, 2006).

Ansoff Matrix:

Present Product Present Market

New Product

Market Penetration
Hotels Grocery Stores Schools Businesses Industries Cafeteria Airlines Universities

Product Development:
Salads New bold Fresh lunch Snacks Other beverages like cold coffee Ice cream

Market Development:
Opening Stores all over the world. India, Brazil, Russia and making the first Starbucks logo in Cairo Egypt. Almost every metropolitan city in the world.

Diversification:
Music CDs Clothing Coffee Mugs Chocolate

New Market

My Strategic Solution:
My opinion:
1. More expansion in East and Far East Asia: Starbucks should now look for more new markets in east and Far East especially in Asia and Far East Asia. There is a huge potential market there and Im sure they will do very good there. What they need to do a huge cultural study on the local culture which they did not do when they opened store in Chicago at initial stage. They will have to bear that in their mind that, the product line should be completely different in those countries due to climate and taste preference of consumers. As an example: when McDonalds operates in India, they have some veggie burger in their catalogue which is with Indian flavour and this product has well accepted by local customers. Possibly, they can introduce coconut water if they want to operate in Vietnam. In a word they would have to come out of Coffee Ego and crack the market. 2. Store Lay-out: They need to reassess their store lay-out in some areas. If it is a residential Area, then they can make some external facilities like Coffee Garden which will be more relaxing for customers. 3. Drive way store: They should open drive-way stores in motorways (or) dual carriage ways like McDonalds. What they should do now (based on 2010): 1. Franchising: Franchising is the best option to expand the operation. If they find out a very strong partner who can spread their business in their country, then Starbucks should go for it. Like SSP in UK who has got 28 brands in their portfolio. 2. New Market: They need to find new market in different countries. They need a huge cultural study on different market and that is how they should move on. 3. Different scheme: They can introduce different schemes like loyalty card for customers. 4. Mobile coffee shop: They can participate in different events like London Olympic by mobile coffee shops. 5. Advertising: Even though they only spend 4% of operating cost in advertising, but they should more advertising. Specially, when they would go to new markets in different countries.

REFERENCES
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Ian & Chris, (2009). The strategic management of organizations. Prentice Hall publications. London. Isobel Doole and Robin Lowe (2008), International marketing strategy: analysis, development and implementation, 5th edition, Cengage Learning EMEA. Laurie.J.Mullins, (2007), management and organizational behavior- the organizational setting, 8th edition. Lindemann, J. (2007). Brand Valuation, New York: Interbrand. Luther, (2011). The marketing plan: how to prepare and implement?. 4th edition. Library of congress cataloguing publication data, New York. Kotler and Armstrong, (2009), Management and Organisational Behaviour. 8th ed. Prentice Hall, Essex. Kanji, G. (2006). Can Total Quality Management Help Innovation? Journals Oxford Ltd , 7 (1), 3-9. Starbucks corporation (2012): http://www.starbucks.com/ accessed on 5th jan 2012