Starbucks Case

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 Starbucks Case

INSTRUCTOR
Dr. Jeri Jones

FROM:
Praneetha Tempalli
Donghyun Kim
Jennifer Hancock
Akhil Toshniwal

External Environment Analysis

Specific environment analysis

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 Starbucks Case

1. Rivalry of existing firms- Rivalry amongst existing firms is pretty high. There

are large numbers of competitors. Chains like illycaffe, Lavazza, Nescafe and

Bobcorp are some of the competing firms as big as Starbucks with a strong

hold in different geographic regions. Thus competing with these firms is

quite hard. As there is no differentiation and switching costs for customers,

competition is dominant. As firms invest millions and billions into this

business, they fight till the last cent.

2. Potential Entrants- There are two ways to look at potential entrants. First

thought would be the threat of Mom and Pop Coffee houses. They seem to be

pretty high as it is easy for anyone to start a coffee house with less available

resources. Second thought gives us an idea that if we compare the size of new

entrants to the size of Starbucks the same threat seems negligible, as it

requires vast amount of resources and time to be in competition with

Starbucks.

3. Bargaining power of buyers - Products offered by different firms is identical

and undifferentiated, moreover there are no switching costs for customers so

bargaining power of buyers is apparently high.

4. Bargaining power of suppliers- Bargaining power of suppliers is high as coffee

beans are the single most important ingredient to Starbucks and there is no

substitute product for coffee beans. If Starbucks choose to switch to a new

supplier, switching costs and other hassles would be high. Quality of service

of the new supplier is unknown and integrating this supplier in the Starbucks

supply chain is a big challenge for Starbucks.

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 Starbucks Case

5. Threat of substitute products- Threat of substitutes is relatively high.

Increasing consumption of bottled water, popularity of energy drinks and

drinks offering vitamin & mineral fortification are giving coffee a big

competition.

General Environment Analysis

1. Economic- Starbucks had $312 million in cash and cash equivalents by the

end of 2006 not by selling stock or taking on debt, which is impressive. Total

net revenue increased by 22% and for fifteen consecutive years it attained

increase in comparable store sales of 5% or greater. These numbers indicate

that Starbucks is a healthy company with great prospects. Starbucks also

invested $6.5 million, $6.2 million and $4.7 million in 2006, 2005 and 2004,

which shows that Starbucks is enjoying a healthy bottom line.

2. Demographic- 80% of United States adults consume coffee regularly and half

of them consume coffee on a daily basis, which is close to 300 million cups of

coffee sold everyday. If we look at Exhibit 2 in the case, we can see that daily

consumption of coffee amongst adults increased steadily from 13% in 2002

to 16% in 2006.

3. Political/Legal- Starbucks had a clash with a Labor union with something

that they stated on their website. In March 2007, National Labor Relations

Board charged Starbucks with 30 violations for preventing union activities at

four Manhattan outlets. Besides this Starbucks has managed not to get into

legal troubles, which indicates that Starbucks has a good reputation.

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 Starbucks Case

Starbucks was listed amongst 100 best corporate citizens in 2007 and was

the first company to receive Colombian government’s Order of the Grand

Cross Medal.

4. Technological- Starbucks is a technologically advanced company in its field.

Starbucks invested $6.5 million, $6.2million and $4.7 million in 2006, 2005

and 2004. These investments indicate that Starbucks is a technologically

advanced company with the best team of food scientists, engineers, chemists,

and food culinarians at their disposal.

Internal Analysis

In internal analysis we use value chain analysis method.

Primary Activities

1. Customer service- Starbucks considers customer service of utmost

importance and gives high priority to the service. Starbucks mainly focuses

on the human connection that their partners share everyday with customers.

Starbucks is strongly committed in providing great work environment for

their partners & employees and in return Starbucks want them to provide a

great experience to the customers.

2. Sales and Marketing- Starbucks has been pretty effective in determining

customer segments and needs. In 2004, 2005 and 2006 Starbucks invested

$4.7 million, $6.2 million and $6.5 million respectively in R&D to come out

with new products that were demanded by the customers. Starbucks made a

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 Starbucks Case

smart move tapping new market segments with new product offering using

its excellent brand image. Products like rich brewed coffee, cold beverages,

variety of food items, coffee related accessories, CD’s, books were brought

into the market. Not only they have their company owned stores to distribute

their products but also strong alternate distribution channels which include

licensing agreements, food service accounts and other strategic initiatives

with some of the best companies like Kraft Foods, PepsiCo etc. The Brand

image of Starbucks made to spread its wings with pride into entertainment

market. Starbucks captures loyal customers with its best service and

glamorous brand image. Starbucks introduced a card in 2001 and there were

more than 115 million cards surpassing $2.5 billion for total activation and

reloads. The Starbucks card program was so successful in United States that

it was introduced in other countries.

3. Operations- Starbucks spent a large amount of money on R&D for its products

and equipment. Starbucks is known for its quality and the service and all the

good numbers indicate that the operations of the company are in a strong

condition.

Support Activities

1. Firm Infrastructure- Firm infrastructure is non bureaucratic and the

decisions are taken quickly. If the management is convinced with the final

product they skip testing and make the product go public as quickly as

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 Starbucks Case

possible. This shows the flexibility of the organization. Starbucks is listed

amongst 100 best corporate citizens in 2007 and was the first company to

receive Colombian government’s Order of the Grand Cross Medal. Starbucks

has a good reputation with its suppliers as 84% response to Starbucks

partner View in March of 2006 shows high level of satisfaction and

engagement.

2. Technological Development- Starbucks is a technologically advanced

company in its field. Starbucks invested $6.5 million, $6.2million and $4.7

million in 2006, 2005 and 2004. These investments indicate that Starbucks is

a technologically advanced company with the best team of food scientists,

engineers, chemists, and food culinarians at their disposal.

3. Human Resource Management- In 2006 Starbucks was recognized as Best

place to work for the eighth consecutive year by Fortune magazine.

Starbucks goes a step ahead by offering stock options and health care

benefits to its employees who work more than 20 hours per week despite

rising health care cost. Starbucks is known for providing health care benefits

to eligible part-time and full-time partners.

4. Procurement- Starbucks is strong in procurement of goods and services from

its suppliers. Starbucks is well known for its healthy relationship with its

suppliers. Starbucks conducts a Partner View survey every 18 to 24 months.

Starbucks conducted this survey in March 2006 in different countries and

84% response to this survey shows high level of satisfaction and

engagement.

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 Starbucks Case

SWOT

Strengths

 Today the company has 13,700 stores worldwide. This indicates that

Starbucks has a good distribution channel.

 Not only they sell ready made coffee but also high quality coffee beans,

variety of food items, coffee related accessories and equipment, premium

teas, CD’s, books, lifestyle products, super premium ice creams etc.,

 Starbucks selectively locates highly visible stores and suburban malls. They

are known for its widespread on every corner and every couple of blocks.

 Licensing agreements with Kraft Foods, Pepsi Cola, Dreyer’s Grand Ice Cream

etc., have increased the product line of Starbucks and it is able to reach more

people.

 In 2006 Starbucks was recognized as Best place to work for the eighth

consecutive year by Fortune magazine.

 84% response to Starbucks partner View in March of 2006 shows high level

of satisfaction and engagement.

Weaknesses

 Starbucks spends huge amount of money in R&D and innovation however,

there is a possibility that their innovation may falter over time.

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 Starbucks Case

 Starbucks has its chain only in North America that means they are largely

dependent on the US economy. To distribute the business risk they need to

spread the business to other countries as well.

 Starbucks is mainly dependent on coffee business that limits the business

expansion in other segments.

Opportunities

 Starbucks can use its brand name with movies to sell the movie CD’s and

DVD’s through its stores, website and strategic partners.

 Starbucks can also partner with various book writers and book publishing

houses to sell their books in Starbucks stores and if this idea gets successful

they can have a big store with large collection of books & music where people

can enjoy a cup of coffee with books and music like Barnes and Nobles.

 Free re-fills and technology (free downloads of music) provide a competitive

edge to its value proposition.

 As Starbucks brand is all about premium coffee, they can come up with a new

brand of coffee that is not as expensive as Starbucks.

 Starbucks should consider the idea of single-cup pouches that are popular in

other countries as single cup pouches are inexpensive.

Threats

 Medical researches about safety of coffee consumption

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 Starbucks Case

 Increasing consumption of bottled water and increasing competition with

energy drinks, vitamin and mineral drinks.

 Other gourmet coffee providers like illycaffe, Lavazza, nestle etc.

 Starbucks are exposed to rising costs of coffee and other dairy products.

 Decrease in the supply of high quality coffee beans.

 Starbucks is a premium brand that charges premium price for its high quality

coffee but with increasing competition they might have to cut down their

prices that can eventually effect the quality of the coffee.

 Cultural and political issues in different countries.

Critical Issues

Critical Issue 1

Coffee is increasingly becoming a part of life of people. About 80% of U.S. adult

population enjoys coffee regularly and 16% purchases specialty coffee every day.

More encouragingly, the market for specialty coffee is increasing much faster than

other food markets in the world. The potential market is huge enough and the target

market is growing fast. If the firm could grow faster than the target market’s growth

or be successful to attract new customers in the potential market, it may increase its

revenue and profit dramatically. This is an excellent opportunity for Starbucks

Company.

Recommendation

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 Starbucks Case

In order to attract the potential customers who have home-brewed coffee regularly,

it is recommended to develop some products for home brewing such as a specialty

level of fresh roasted or ground coffee, some high quality and affordable personal

coffee brewer, and accessories. This strategy will lead the potential customers to the

world of specialty coffee and be more likely to make them specialty coffee

consumers. To grow faster than the target market’s growth, however, Starbucks

Company should have more aggressive strategies to gain the market share and

expand the presence. Considering refill policy and running vending machines for

specialty coffee could be good approaches.

Critical Issue 2

Capitalizing the distribution channel of Starbucks and taking advantage of licensing

agreements with Kraft Foods, Pepsi Cola, Dreyer’s Grand Ice Cream etc.,

Recommendation

Starbucks has 13,700 stores worldwide and 145,000 partners serving 40 million

customers every week. This indicates strong distribution channel of Starbucks and

the company should take advantage of this opportunity to reach large customer

base and to come up with new products to exploit its strength. Starbucks has not

considered the idea of launching dietary products so far such as protein drinks,

sugar free tablets, fiber rich foods etc., Business expansion in several aspects such as

restaurants, apparel etc., would be easy for Starbucks with its good distribution

channel.

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 Starbucks Case

Critical Issue 3

Many people love coffee but customers prefer other outlets due to less presence of

Starbucks. They end up having other brands of coffee, water, energy drinks and

drinks that offer vitamins and minerals over Starbucks coffee.

Recommendation

Firstly, opening a Starbucks outlet in every corner of street will not only tap the

prospective customers who consume coffee but also to frame Starbucks as the only

brand for coffee which will give a tough competition to existing coffee provider and

also make it difficult for new entrants to enter into the market. Having Starbucks in

every corner will also help it to overcome its substitute, as it will be as easy as to get

Starbucks coffee for any other substitute product. Secondly, Starbucks has its own

energy drink but there is need to increase its awareness among the masses and

there by capturing the market for energy drinks. Thirdly Starbucks has to come up

with vending machines which must be placed in universities, offices etc which

makes its easily available to its consumers.

Recommendations

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 Starbucks Case

As the competition is increasing Starbucks should be more aggressive in their

approach to take advantage of their strengths and to exploit the opportunities.

1. As the consumption of energy drinks and drinks offering vitamin and mineral

fortification is increasing, Starbucks should come up with a variety of healthy

products like sugar free drinks, dietary products, vitamin & energy drinks.

2. We get free refills with soft drinks, why not with a coffee? Starbucks can offer

free refills or a second refill at a low cost. Not only will they be attracting

more customers for coffee but also good sales.

3. As Starbucks has a strong and loyal base of customers with a strong

distribution channel they can come up with their own merchandise.

4. Starbucks should come up with more vending machines in places of high

footfall. This can help them attract impulse customers.

5. Starbucks should also increase their food product offering. For instance they

can introduce doughnuts, burgers and fries that can boost their sales.

6. In the future they can come up with Starbucks coffee lounge with sections

dedicated to movies, music and books in big cities.

7. Starbucks should increase its presence in developing nations like India and

China.

8. Starbucks can come up with a chain of restaurants.

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Starbucks Case

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