Vision for Starbucks:

Our vision as a leader of Starbucks is to create a brand that is synonymous to coffee

all around the world and become a market leader in the non-alcoholic beverage
industry.
The external environment is conducive to growth and being a market leader currently,
puts us at a strong position to take charge and drive growth in the sector. The main
question however is how. In the following report, we discuss various strategic
decisions that need to be taken and evaluate the same with our vision for the company
keeping in mind diverse business constraints and finally, come up with a long-term
strategy to take the firm forward.
Decisions to be taken:
As discussed in class, strategy is defined as a set of decisions. The various decisions
as mentioned during various points of the case are as follows:
1. The decision to partner with McDonalds or not
2. The decision to launch a flavoured coffee or not
3. The decision to expand into new markets (both domestically and
4.
5.
6.
7.
8.

internationally)
The decision to continue with the Mail Order system or not
The decision to launch new products (Frappuccino etc.) or not
The decision to expand via a franchise model or not
The decision to launch a grocery store or not
The decision to launch Doppio or not

Though there are other decisions and implications of past decisions by Howard
Schultz, we limit the discussion in this report to the aforementioned decision.
Constraints:
1.
2.
3.
4.

Poor employee retention of baristas

Increased complications in the supply chain with increased scale
Direct implications of each aforementioned decisions on other decisions
Projected cash downturn in the following three years

Framework followed:
Wed evaluate the decisions by discussing the implications of each decision on
Hambricks diamond. Then, we proceed to identify the business implications (pros and
cons) of each decision on different verticals. Further, keeping the business constraints
in mind and following the vision and values of Starbucks, we proceed to evaluate
each decision and come with a long-term strategy based on these decisions.

Decision # 1: The decision to partner with McDonalds or not:

Underlying rationale:
The partnership with McDonalds is considered as a part of the growth strategy of the
firm.
Hambricks Diamond: The targeted customer segment changes upon a partnership
with McDonalds, which affects the Arena of Hambricks diamond. Further, it
represents a substantial change in the Vehicle element too, as it involves a partnership
with McDonalds in the overall growth. As Starbucks currently operates in a
differentiated through high-level customer service, the dilution of customer service
through a partnership might affect the Differentiator element and lastly, the speed of
expansion is altered as opposed to traditional retail store which affects the Staging
element of the Diamond.
Pros:
1. High speed of expansion
2. Higher customer reach that equates a higher revenue generation in the short
term
Cons:
1. Brand dilution The brand Starbucks that has been built over the past few
years could easily be disintegrated through an apparent lack of high quality
customer service and ambience at the McDonalds stores
2. Lower decision making flexibility A partnership with a giant like
McDonalds could easily shift the power base from in house to McDonalds
3. Price Starbucks currently operates in the premium price category and
McDonalds acts in the low-price affordable meal category.
Decision:
NO.
Rationale:
Wed not like to enter into a partnership with McDonalds, owing to a lack of apparent
synergies of operation. McDonalds is currently a distant competitor in the beverage
industry where we want to grow Starbucks and poses a greater risk of brand dilution
in case of a partnership. Our vision for Starbucks is that of a luxury brand and dilution
of the brand is too high a risk to be taken for short-term expansion.

Lastly, McDonalds is a long-term partner with Coca-Cola which could probably pose
complications with a possible future venture into Frappuccino with Pepsi.
Decision # 2: The decision to launch a flavoured coffee or not:
Hambricks Diamond: This decision represents a diversification of product portfolio
and by implication a change in the customer segment. This directly affects the Arena
element of the Diamond. Further, it affects the Staging element by pooling in
investment to introduce new varieties of coffee, leaving lesser investment into
geographical expansion of stores.
Pros:
1. Expanding customer segment
2. Diversified product portfolio, hedging the risk of production of a single variety
Cons:
1. Requires investment that could be better invested into expansion of stores
Decision:
YES, but on a small scale. (2-3 varieties of flavoured coffee, preferably nut based)
Rationale:
We believe diversifying product portfolio helps in attracting a new target segment and
represents proper business sense and has no effect on the brand value of the firm. The
major challenge is the opportunity cost of the funds invested elsewhere. Hence, we
opted for a middle ground wherein wed launch a few flavoured coffees (Hazelnut and
Chocolate) that are of nut-origin that represent lower production costs over fruit
flavoured coffees. The cost of capital could be lowered and the residual funds are
believed to be better invested in geographical expansion.

Decision # 3: The decision to expand into new markets (both domestically and
internationally)

Hambricks Diamond: This decision primarily affects the Arena as it affects the
geography of operation. Further, it indirectly affects the economic logic element as
opening up new stores requires huge amount of capital investment.
Pros:
1. Expanding customer segment
2. Greater reach to target segments
3. Reaching out to customers before competitions First mover advantage
Cons:
1.
2.
3.
4.
5.

Huge amounts of capital investment required in opening up a store

Regulatory adherence in terms of FDI in various geographies
Might indirectly cannibalize the mail order sales
Low availability and high turnover of Baristas
Supply Chain complications

Decision:
YES. Expand domestically and limited countries internationally (Preferably
developed nations with high brand presence)
Rationale:
With our vision of getting Starbucks right onto the top of the curve, geographical
expansion is quintessential for growth. Though this is a risky proposition with more
cons than pros, we believe with our expertise in the coffee market and high brand
value that the firm currently holds and the growth stage of the firm, it makes proper
business sense to expand into new expansive untapped markets would give us first
mover advantage and further stabilize our brand value. With a high degree of
operational efficiency this option needs to be carefully executed by starting on a low
scale and expanding gradually.

Decision # 4: The decision to continue with the Mail Order system or not
Hambricks Diamond: This decision primarily affects the Arena as it affects the
mode of operation.
Pros:

1. Larger transaction size

2. Untapped market penetration
Cons:
1. Cannibalizing new market entry and possible grocery store entry
Decision:
YES.
Rationale:
Mail order has proven to be a good investment for Starbucks through the pros
mentioned before. Hence, it is suggested to carry on with the idea and further
establish it to expand our customer segment.
Decision # 5: The decision to launch new products (Frappuccino etc.) or not
Hambricks Diamond: This decision primarily affects the Arena as it affects the
mode of operation. Further, it affects the vehicle element, as it requires partnerships
with various established entities to affect the cause.
Pros:
1. Expanding customer segment
2. Higher scale of operations
Cons:
1. Possible dilution of brand image through a lack of quality
2. Price
Decision:
NO.
Rationale:
Theres a high chance of brand dilution and an operation with Pepsi doesnt let
Starbucks operate in the premium price segment as weve always been operating. The
idea of a luxurious brand could get diluted and with an added disadvantage of an
inferior product might not reflect well on the brand.
Decision # 6: The decision to launch a grocery store or not
Hambricks Diamond: This primarily affects the Arena element as it affects the mode
of operations of the firm
Pros:

Stores are major players in coffee for home segment. Will provide reach to
households and thus better brand recognition. Currently 80% of sales are through
these channels.
Cons:
The trend of sale of specialty coffee through grocery is decreasing while the sale
through specialty stores is expected to increase to 54 percent by 1999. Also, the
experience part will be missing if delivered through grocery part. Further, it
cannibalizes into our mail order system
Decision:
NO.
Rationale:
The lack of market inclination towards grocery purchases, coupled with a lower
margin on grocery products makes the decision for itself. Further, we operate on
offering an experience to customers and this is curtailed by the sale of products
through grocery stores.
Decision # 7: The decision to expand via a franchise model or not
Hambricks Diamond: This directly affects the Vehicle element of the diamond and
the Staging element as it affects the speed of expansion.
Pros:
1.
2.
3.
4.

Greater rate of expansion

Lower investment required for expansion
Lower problems in A-site real eastate
Possible enhancement of brand value

Cons:
1. Possible brand dilution
2. Possible drop in customer experience
Decision:
YES.
Rationale:
The expansion of retail stores is a critical juncture for the firm. In accordance to our
vision for the firm, wed like to roll out franchises to interested parties to support our
growth and development. Further, the strategy is to make the model highly efficient

by imposing strict quality constraints on the franchise lease owners to ensure

consistency of product and sustaining brand value
Decision # 8: The decision to launch Doppio or not
Hambricks Diamond: This decision primarily affects the Arena as it affects the
mode of operation.
Pros:
Better market penetration. Out of 10000 retails these will be 4500 by 1999. With
dwindling spaces in primary location, this is one of best options to reach maximum
people. Further,
1. Expand customer base,
2. Entering new geographies
3. Increased revenue and margins
Cons:
1. Possible drop in customer experience
2. Inequities between employees of retail stores and doppios
3. Drop in brand value
Decision:
NO
Rationale:
Doppios are makeshift arrangements and lack ambience and experience of main retail
stores. Also the feel of affordable luxury with a variety in offerings will be missing.
Hence, we would not like to venture into this space.
In relation with the aforementioned decisions, the strategy for Starbucks is
represented in the Hambricks diamond below:

Vehicles: How??
Expansion through retail
Hambrick's
stores and JV.

Development of improved
diamond
Differentiators:
roasting and blending
Great
Experience for the
Economic
Logic
techniques.
(STRATEGY)
Staging
Vehicles
customer
Partnership with Pepsi on a
Propriety
roasting and
quality condition
Economic Logic:
manufacturing equipment
Cost will reduce with increasing scale Strong Culture
Differentiators
Premium can be charged
for the experience
Brand Value
Increase in volume with expansion in domestic
and foreign
market
Informed
Employees
will help in increasing revenue
Arenas

Arenas: Where will we be active?

Product coffee and its
derivatives, slowly diversify to
other products
Market Segments: Urban,
educated and people looking for
experience.
Geographic area Pacific rim,
North America
Core Technologies: Propriety
roasting curve and blending
Value Creation: Retail outlet
experience, sourcing and
production chain, Roasting

Staging: Speed and Sequence

Rapid expansion of retail stores
in Pacific rim using the
franchise model
First Expand through retail
stores where people can have
experience and thus build
brand
Exclude reach through grocery
sales and Doppios

Ratio Analysis:
Financial Ratios:
Profitability Ratios:
Return on Sales
Return on Equity

0.036
0.114

0.056
0.098

0.060
0.117

0.060
0.111

0.069
0.140

0.075
0.158

Liquidity Ratios:
Current Ratio
Quick Ratio

2.093
0.706

2.890
1.150

3.359
2.534

2.149
1.236

1.508
0.606

1.296
0.397

Leverage Ratios:
Debt/Equity Ratio
Asset/Equity Ratio

0.903
2.106

0.320
1.499

0.481
1.609

N/A
N/A

N/A
N/A

N/A
N/A

Activity Ratio:
Asset Turnover Ratio

1.231

0.994

0.959

1.159

1.299

1.350

Inferences from Quantitative Analysis:

1. The drop in Quick ratio is a cause for concern as it depicts lower liquidity
level.
2. The quick ratio in comparison with current ratio reflects the higher than usual
level of inventories and this represents a higher turnover ratio of assets
3. The increased Asset Turnover ratio is a positive thing as it means were able to
turn the assets to sales at a higher rate than usual.
4. The drop in Current Ratio is a cause for concern, as it represents a lower than
usual liquidity and lower liquidity is not a good sign during store expansion.