APPLE INC.

AND
STARBUCKS CORPORATION:
iSTATIONS

Emily Poon  Raffaele Ricchio  Miguel Rolo  Beibei Tang

Mohad Ali  Leo Uzlaner  Shane Lieberman  Jennifer Ferdinands

ADMS 4215 – Professor Charles Hendricks

November 12, 2007
 TABLE OF CONTENTS
Executive Summary 3

Apple Inc: A SWOT Analysis 4

Situational Analysis
Business Customer: Starbucks Corporation 5
End User 7

Insight into Demand 10

Competition Analysis
Dell 15
Hewlett Packer 18
IBM 20

Environmental Climate 22

Recommendations 25
Mission Statement
Marketing Objectives

Product Strategy 26

Pricing Strategy 30

Distribution Strategy 32

Promotional Strategy 35

Financial Analysis
Cash Outflows 39
Break Even Analysis 40
Cost per Customer 40

Appendix
Appendix 1: Starbucks New Store Growth 42
Appendix 2: Financial Statements, Starbucks 43
Appendix 3: Segmentation Chart 44
Appendix 4: Promotional Budgetary Issues 45
Appendix 5: Possible Locations 47
EXECUTIVE SUMMARY

Apple, Inc. was incorporated on January 3, 1977 with the mission to manufacture and design
quality personal computers and software. Apple creates and markets personal computers and portable
digital music players as well as accessories and services. Apple‘s products and services include the
Macintosh® line of desktops and portable computers, the Mac OSX® operating system, the iPod®
line of portable digital music players, the iTunes Store®, as well as a portfolio of peripherals that
support the computer and mp3 player product lines. Apple sells to various markets including
consumers, creative professionals, government and business customers. Apple‘s business strategy
leverages its unique ability to design and develop its own operating system, hardware, application
software, and services to provide customers new products and solutions with superior ease-of-use,
seamless integration, and innovative industrial design.1

As the market for personal computers grows each year, Apple seeks to capitalize on this
growth by strengthening its foothold in the industry. In order to accomplish this, Apple has recognized
a need to leverage their brand in defense of intense competition in the market. In recent years, there
has been a decline in Apple‘s market share in computer products from 15%-6.1%2. In order to remain
competitive and attract more consumers, Apple has to find other innovative avenues to increase their
market share and increase exposure to target audiences. More specifically, Apple must find new
potential customers and introduce them to Apple products through unique promotional methods and
channels. Apple must adapt to changing customer needs by engaging more closely with their target
market. Apple has determined a way to accomplish this via an alliance with Starbucks.

The proposed plan is to set up various Internet work stations within various Starbucks locations
across the United States. The plan is predicated on two basic principles, the growing trend for wireless
Internet stations, and the high potential within the coffee industry to tap into customer segments. The
stations have been aptly dubbed, iStations.

The rationale behind working with Starbucks is that they share some of the fundamental goals
and qualities that would make the relationship quite synergetic. Above all, both companies share some
of the same customers, who have similar attitudes, values and beliefs. The proposed alliance between
Apple and Starbucks would ultimately cost Apple approximately $0.11 per end-user, or 8.71 people
per dollar spent. These and other financial analyses will be discussed in further detail in the plan.
What is most important is that the financial forecast shows that this business venture will be profitable
and enable Apple to achieve their goals and objectives.

1
―Company background‖ p7. Form 10-K, 2006. Apple Computer, Inc. United States Securities And Exchange Commission
Washington, D.C.
2
This number is variable based on which companies are selected for measurement
Apple Inc: A SWOT Analysis

Strengths
Brand Image
 Innovation and creativity fosters brand
equity
 Its strong brand image allows the
company to charge premium prices for
their products
Wide Product Mix
 Allows Apple to enter different
segments and markets; transferring
brand equity
Popularity Amongst the Younger Segments
 Highly recognized by the younger
segment; top of the mind awareness
Strong Financial Performance
 cash flows indicate strong financial
health, thus helping reducing the risk of
new product ventures
Threats
Intense Competition
A lot of competitors trying to mimic Apple‘s
success. They may be inclined to copy
upcoming Apple investments and
partnerships.
Commoditization of PCs4
Demand for branded PCs is decreasing as
standardization reduces the quality difference
between branded and unbranded PCs and
components. As a result, it is becoming harder
for the company to successfully differentiate its
products from firms that produce unbranded
goods. Commoditization of PCs threatens
brand image.
Weakness
Limited Customer Profile
 Apple Inc is a niche brand, and as such
appeal to a very narrow and specific
group of consumers
Decline in R&D
 Apple‘s investment in R&D has
increased from $446 million, in 2002,
to $712 million, in 2006, yet its R&D
investment as a percentage of total
revenues has declined from 7.8% in
2002 to 3.8% in 2006.3
 Continued decline in R&D investments
could adversely affect the future
competitiveness of the company in
rapidly evolving technology markets
Opportunities
Widening Product Offering
Wireless industry has taken off in recent years,
as more and more people adapt to wireless
technologies, giving rise to opportunities in
new product development
Entry into New Segments
To increase market share of PC‘s, Apple needs
to look towards bigger and sustainable
markets. They are currently a ‗niche‘ brand and
this inhibits them from increasing their share of
market.

3
Marketline. Apple Computer, Inc. August 13 2007. Retrieved October 15 2007. <http://dbic.datamonitor.com>
4
Ibid
 SITUATIONAL ANALYSIS

Customer Profile
This plan is directed towards a single business customer, Starbucks. The following discussion outlines
the strategic rational behind why Starbucks should consider the proposition; that is how can Apple
benefit Starbucks.

1. Business Customer Profile: Starbucks

Starbucks Corporation, Starbucks, is a leading specialty coffee retailer in both the US and Canada.
They produce and selling a broad variety of hot and cold beverages, sweets and media products via
10,000 locations across the globe. To achieve success, the company uses its strong brand image to
increase differentiate its offerings and craft a solid competitive position.

Strengths
Brand Image
Starbucks has built an excellent global reputation
based on the quality of its products and for its
delivery of a consistently positive consumer
experience. Starbucks is an Experience, not just
a coffee retailer.
Financially Strong
Starbucks has reported consistent revenue
growth over the last five years. This is
significant because it provides the company
with a strong financial base and enables it to
undertake new business ventures.
Expansion! Expansion!
Starbucks‘ mantra is to be ―everywhere.‖ This
allows for excellent market coverage. The
company‘s widespread presence provides it with
brand recognition and a strong customer base.
Clustering of company units
With the continued growth of the coffee market,
the company has looked to expand its business,
including those areas where it has an established
presence. Working on the basis that a key driver
of business is the convenience of the company‘s
outlet location, Starbucks has targeted clustering
its units so as to dominate particular areas.5
Opportunities
Entry into new markets
As part of its strategy to increase its worldwide
presence, Starbucks has recently opened stores in
several new countries. This would provide the
company with new opportunities for revenue
growth.
New stores
Starbucks opened 735 new company-operated
stores during 2005.
Growth in coffee market
The specialty coffee sector accounts for roughly
15% of the US retail coffee market. The market
experienced 157% growth in value terms between
2000 ($3,258 million) and 2005, to reach $8,372
million in total. This tremendous growth was
driven by the enormous appetite Americans have
shown for up-market and premium-priced coffees.
Over the next five years, sales are expected to
grow by a further 125% to reach an impressive
$18,839 million by 2010. Starbucks has a market
share of over 40% of the specialty coffee market,
and the anticipated growth in this category will
offer the company considerable opportunities for
further growth and expansion in the near future.6

5
Marketline. Starbucks. April 4th 2007. Retrieved Oct 15 2007. <http://dbic.datamonitor.com>
6
Marketline. Starbucks. April 4th 2007. Retrieved Oct 15 2007. <http://dbic.datamonitor.com>
 Weaknesses Threats
Reliance on brand Competition
Success depends highly on the value of the Face intense competition from a wide range of
Starbucks brand. Therefore, they must pay sectors: restaurants, coffee shops, etc
crucial attention to the way their actions may
affect brand equity. Slowing US retail sales
The company faces long-term concerns regarding
Reliance on beverage innovation its US store growth potential. If current growth
Historically, Starbucks‘ store sales growth has continues, saturation levels within the North
been dominated beverage innovation; but how American retail division will be reached within
sustainable is this? five years.7

Problems in some international operations

The company has been facing certain difficulties
in some of its international operations and
expansions. The have faced several failures
across seas.

Key Insight:

1. Reliance on Beverage Innovation

2. Problems in International Operations
3. Intense Competition

A strategic alliance with Apple Inc can help diversify the service options that end-users may find
at specific Starbucks locations. This will help:

1. Shift reliance from beverages onto a wider scope of services

2. Help stimulate demand in a saturated market; particularly important given international issues
3. Help them better position themselves against competitors

7
Marketline. Starbucks. April 4th 2007. Retrieved Oct 15 2007. <http://dbic.datamonitor.com>
2. End-Users
The following table outlines both the end-users from Apple‘s and Starbuck‘s perspective. The purpose
of such a comparison is to show that both companies are targeting a similar target audience. Thus
demonstrating an alliance between two can enhance their efforts in appeasing to this target audiences
demand.
Starbucks Consumers Apple Consumers

 The average Starbucks customer is 36 years  Apple users are more likely than PC
of age and their average income is $65,000 - users to ―have a higher household
however; has been declining over the years. income, have received a graduate degree
and be self-employed.‖16
 The largest percentages of coffee drinkers
are between the ages of 18-39. They are  Apple customers are loyal, have great
―drinking more specialty coffee drinks than passion and are very outspoken. ―In
any other group in America.‖ 8 Apple's 30 years of business, they have
formed a tight-knit, unique
 As many as 8% of new customers, community.‖ 17 Some have stated that
compared to 32% of established customers, "they're probably the largest subculture" -
feel that Starbucks is worth paying more not only are they consumers of Apple
for. products, but sales people as well.

 Starbucks has also become a center for  Now that Apple has introduced the
socializing and intellectual discussion, ‗Apple Store‘, these communities are
particularly among students and young able to share and enjoy all of there
urban professionals. favourite apple products, further
embracing and promoting the Apple
 Starbucks created a ―unique offering that culture.
was relevant and differentiated. It turned an
ordinary and humble product into an  Approximately 50% of Apple customers
extraordinary experience that customers are plan to buy another Apple computer. This
9
willing to embrace.‖ demonstrates consumers strong brand
loyalty and future commitment to Apple.
 Starbucks has focused on the ―experience‖
around the consumption of coffee. Its
branding strategy consists of coffee, service,
and atmosphere. ―People come for the
coffee, but the ambience is what makes
them want to stay‖10

8
McHenry, Tessa. Online Journal for Northern Nevada. Coffee Consumption on the Rise. April.2.2003
<http://zephyr.unr.edu/zephyr/spring_03_pages/publish040203/mchenry_coffee.html>
9
Learning from Starbucks: 10 Lessions for Small Business. October 5th, 2004.
<http://www.powerhomebiz.com/vol144/starbucks.htm >
10
Young, Moon. and Quelch, John. Harvard Business School, February 3rd,2004.
  Starbucks began offering wireless Internet  ―Unlike users of Microsoft‘s Windows
access in 2001 to ―enhance the experience computers, a significant portion of
for students, business travelers, and web Apple's users are active, exploratory,
surfers who take advantage of this service and early adopters. They demonstrate a
while sipping their favorite coffee.‖11 more-active ‗prosumer‘ behavior than
many more-passive Windows users.‖18
 Starbucks is committed to selling the
"experience" while conducting its business  Today, the brand stands for ―cool, hip,
in ways that ―produce social, environmental and cutting-edge products that capture
and economic benefits for communities in people's imagination. Steve Jobs (CEO)
which it does business.12 has a flair for the dramatic, and also
captures people's imagination.‖ 19
 Starbucks also began to sell music CDs in Consumers buy Apple products because
its coffee shops because the ―number one of the personal association with the latter
question from their customers is, `What is factors, and a (leader) CEO that many
13
that song playing?‖ consider their God. [Cult-like behavior]

 Starbucks has created a retail environment  Many people tend to note that it is ‗hard
where people come in and pay attention to to get people to move to a Mac, but once
what is going on around them, rather than they do they tend to stay.‘ 20
just trying to get in and out with their
coffee.

 Schultz (Chairman) sees a Starbucks store

as the "third place" in a person's life -- after
home and work 14 . People come to
Starbucks to get away from the noise, and
we have to treat it like a sacred
environment.15

16
Lee, Ellen. Faithful Sometimes Fanatical. March 26 2006.
<.http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2006/03/26/APPLECULTURE.TMP>
17
Ibid.
11
Learning from Starbucks: 10 Lessions for Small Business. October 5th, 2004.
<http://www.powerhomebiz.com/vol144/starbucks.htm >
12
Anonymous. Claritas. Starbucks Segmentation 2007.
<http://www.claritas.com/claritas/Default.jsp?ci=2&pn=cs_starbucks>
13
Ibid
14
Grover, Ronald. ―Starbucks Perks Up Socially Conscious Films.‖ Business Week Online. April 26 2006.
<http://www.businessweek.com/bwdaily/dnflash/apr2006/nf20060426_2414_db011.htm?chan=search>
15
Ibid
18
―Technology User-Profile – Apple Macintosh Market Profile Report.‖ Metafacts, Inc. 2005.
<http://www.metafacts.com/pages/tup_profile_reports/pd37_apple_brochure.pdf>
19
Yoffie, David. ―Where Does Apple Go From Here?‖ Harvard Business School. February 024 2004.
<http://hbswk.hbs.edu/item/3877.html>
20
Anonymous. ―Apple Aces Academia.‖ Business Week Online. August 05 2004
<http://www.businessweek.com/technology/content/aug2004/tc2004085_0709_tc153.htm?chan=search>
Summary

As demonstrated above, both Starbucks and Apple focus on similar target audiences. We have learned
that these consumers are loyal, passionate, active (both in store and out), and regard the respective
brand as their own. Each consumer group enjoys the environment and atmosphere they frequent (both
at Starbucks coffee houses and Apple retail stores), and view it as a ‗third‘ place (Starbucks) where
they can escape when not at work or home.

Both Apple and Starbucks consumers feel that they are part of a privileged and exclusive cultural
group that extends beyond the products available for sale. Many discussion boards and websites have
been developed by consumer fanatics to further expand each ‗culture‘. These consumers have become
the envy of rival-marketers, as they not only support the brand, but aid in selling the products through
various mediums.
INSIGHTS INTO DEMAND

To show that there will be demand for Apple iStations and the cohesiveness of the two brands, an
understanding of industry and customer trends is necessary. A look at the specialty food and beverage
industry, and how Starbucks stands within the industry, will provide a macro-to-micro analysis.

Coffee Industry in America

In 2006, coffee sales in the US accounted for $3345.8 million (approximately 62.7%) of total US ―hot
drinks‖ market. The market is expected to grow by 1.1% over the next 4 years to a value of $9,565.8
million, by the end of 2011. Currently Starbucks has 11.5% of US hot drinks market share, competing
with rivals such as Altria group (28.5%) and Proctor & Gamble (22.30%). An increasingly important
factor is the distribution of coffee in the US. While approximately 60% of hot drinks are distributed in
supermarkets, 17.20% are distributed in independent retail stores.21

The potential growth of the coffee market is clearly an asset, and the proposed venture may be an
excellent opportunity for Starbucks‘ to increase its market share in the hot drinks, and coffee industry
particularly.

The number of coffee drinkers in the U.S. has risen 7% in the last 2 years22. Figure 1 indicates the
increase in consumption of coffee drinkers between the ages of 18-24. Of all age groups, they show
steady and increasing growth; suggesting that they fuel a large portion of the coffee industry. Figure 2
illustrates that the same segment of individuals drives the specialty coffee market,23 making Starbucks
a good touch point with these consumers. In turn, this is important for Apple as it suggests a new
opportunity to create a touch point with consumers.

Figure 1: Coffee
Consumption within 18-24
Figure 2: Specialty Coffee Markets driven
age groups.
by 18-24 year olds

Depicts audience
of interest

Trends in the Specialty Foods and Beverages

21
Anonymous. ―Hot Drinks in the United States‖. MarketLine. Starbucks. September 2007.
22
Cadence. ―Supplements, Part 3: Caffeine.‖ Cadence Kona Challenge. June 27, 2007.
< http://www.cadencecycling.com/training/blog/2007/06/supplements-aart-3-caffeine.aspx>
23
Coffee Consumption Research. National Coffee Association of U.S.A. Inc, 2007.
<http://www.ncausa.org/i4a/pages/index.cfm?pageid=38>
Within the specialty beverage industry, there are three prevailing trends that exist: sensory, health, and
convenience. These three trends are the driving forces of customer preference. Based on the
proposed iStation, for both Starbucks and Apple sensory delivery is an important value to their
customers. Each company offers unique and exclusive products that allow customers to have a higher
value perception and even pay more for it. When consuming Starbucks‘ gourmet coffee beverages,
customers may feel special or exclusive—similar to Apple customers. This suggests that these evoked
sensory feelings are central to the brand value that is communicated by both Starbucks and Apple.

Consumer Trends: Wireless Technology and Coffee Shops

There is an increased trend of wireless technology in establishments such as airports, hotels and coffee
shops. Offering free wireless technology has proven to be a success factor for establishments such as
coffee shops. Wireless technology has increased the communication between family, friends and
colleagues. This increase in communication technology would provide an opportunity for Starbucks.
From this, the Apple iStation will act as an added benefit for Starbucks.

Conclusions

For Starbucks, the needs of the younger customer segment have been changing. In order to satisfy
these needs, it is crucial for Starbucks to deliver value in an innovative way. In essence, the customers
of Starbucks share the same attitudes and are demographically akin to Apple users. Understanding the
behaviours and attitudes is key knowledge for Apple to determine how to increase the satisfaction of
this customer segment. By implementing the iStations in Starbucks, it can potentially increase their
lifetime value and retention for Starbucks.

The growth in consumption of individuals between the ages of 18-24 indicates much opportunity.
Within the coffee industry, Starbucks is the leader in specialty beverages. For this reason, Apple has
chosen Starbucks as a strategic partner is because of Starbucks position as a leader in the coffee
industry. The rationale behind this strategic alliance is that it can potentially attract more customers for
Starbucks and, in turn, opens up another promotional venue for Apple.

For existing Apple users, iStations will be able to build on their brand loyalty to Apple. In addition, by
implementing iStations in Starbucks stores, non-existing prospective Apple customers will be given
the opportunity to sample Apple devices, allowing them to experience the functions of Apple‘s
products, and possibly enticing them to buy Apple‘s products.
 STARBUCKS WITHIN THE COFFEE INDUSTRY: SPECS

Market Size

Starbucks‘ wide coverage of company-operated retail stores provides Apple with a great opportunity
to reach more customers, get more instant feedbacks and understand the needs of consumers. The great
potential market and demand can be anticipated through Starbucks‘s exponentially increasing
company-operated retail stores, sustainable rising revenues, and the variety of services.

1. Company-operated retail stores

Starbucks strategy for expanding its retail business is to increase its market share primarily by opening
additional stores in existing markets and to open stores in new markets where the opportunity exists to
become the leading specialty coffee retailer. In support of this strategy, Starbucks opened 1,040 new
Company-operated stores during the fiscal year ended October 1, 2006 (―fiscal 2006‖). Starbucks
Company-operated retail stores, including 11 Seattle‘s Best Coffee (―SBC‖) stores and 4HearMusic
retail stores, accounted for 85% of total net revenues during fiscal 2006.24

Starbucks has kept it‘s exceptionally strong and enduring growth since it was established. Their
company-operated retail store has been increasing through the years. In its fiscal year 2006, Starbucks
opened 810 new stores in U.S., an increase of 39.66% compared to their new stores opened in fiscal
year 2005. As of October 1, 2006, there were 5,728 stores operated in U.S. 25

See Appendix 1 for New Store Growth Data

2. Sustainable rising revenues

Starbucks increase their revenue through operations. The most revenue generated is from their
company-operated retail stores. In North America (the company‘s core market where it ranks third),
Starbucks‘ performance was in line with the hot drinks market (6%).26

See Appendix 2 for Financial Statements and Supplementary Data

3. Variety of services

Starbucks‘ continual innovation allows them to extend their unique brand experience beyond their
retail stores. A new ready-to-go beverage gives them the chance to expand their business into grocery
stores. Starbucks‘ entertainment services include their new movies, CDs, wireless Internet, and book
offerings that are aimed to appeal to a younger target market. A new product of natural spring water
announced Starbucks are going to explore the bottle water‘s market. All other food services such as
sandwiches, cookies, bakery, yogurt etc. are part of their attracting side business. The variety of
services not only helps Starbucks to accomplish their customer‘s satisfaction but also allows them to
collaborate with partners in different industries.

24
Starbucks Corporation. Form 10-K. 2006 Annual Report - Financials, p3
25
Starbucks Corporation. Form 10-K. 2006 Annual Report - Financials, p4
26 ―
Hot Drinks Market‖. Starbucks Corp-Hot Drinks-World, Mar 15, 2007. GMID - Global Market Information Database.
Retrieved on Oct 5, 2007.
 Potential Market Reach:

How Many People can Starbucks help Apple Reach?

At this point it is hard to quantify demand for a product that is currently not being asked for.
However, to bring about some kind of empirical rationale, we can try to determine how many people
within our focal audience may be reached if such a project is undertaken.

Population of American Cities where we intend to launch the iStation.

City Population within Age Group of Interest

(20-34)27

Seattle, Washington 186,213.94

San Jose, California 242,036.45
San Francisco, California 253,967.35
Los Angeles, California 1,046,065.55
San Diego, California 351,886.84
New York, New York 2,102,703.40
Las Vegas, Nevada 115,745.50
Philadelphia, Pennsylvania 367,810.82
Boston, Massachusetts 209,261.65
Indianapolis, Indiana 201,666.43
TOTAL 5,077,358 people

Statistics from the National Coffee Association of the U.S.A. show that Americans within the age
group of 18-25 make up for nearly half, 45%, of total coffee consumption.28 Within this segment, 24%
of people between the ages of 18-34 drink coffee on a daily basis.29 Therefore, based on these figures,
5, 077, 358 people may be reached. Market share of Starbucks varies depending on the way one
classifies and divides the coffee industry in the United States. It is estimated that they monopolize 73%
of the gourmet coffee market.30 Therefore, 889,553 could be the potential reach.

Potential reach could vary given:

a) The accuracy of the percentages used above;

b) The selection of cities to launch the project;
c) The spill over effect onto people who aren‘t within the target audience.

27
Population figures take from www.citydata.com. These numbers were then multiplied by the population growth rate to
find data estimates for 2006 figures.
28
Coffee Consumption Research. National Coffee Association of U.S.A. Inc, 2007.
<http://www.ncausa.org/i4a/pages/index.cfm?pageid=38>
29
Holmes, H. Coffee Shop. University of San Antonio. November 30 2004.
<http://sbdcnet.org/E-Newsletters/CoffeeShop.pdf>
30
Iwata, Edward. ―Owners of Small Coffee shop takes on Starbucks.‖ USA Today. 2007.
<http://www.usatoday.com/money/industries/food/2006-12-20-starbucks-usat_x.htm>
 Purchasing Behaviour

From the perspective of Starbucks, the purchase of the iStation would represent a new-buy as it
represents a product category they are not currently involved in. This allows us to infer the following:

 Given Starbucks interest in the project, they would not have an evoked set of suppliers. Therefore, it
gives Apple leverage in successfully marketing themselves for the deal.
 The value proposition, as to why this project will increase value to Starbuck‘s end users, becomes
extremely important as it is out of their current realm of transactions.
 The following chart shows the elements involved in the selection process, from the purchasers
perspective.

Decision Process Stage Managerial Implication

Recognition of Needs
Development of Specifications
Search for Sources and Acquire Proposals
Evaluate Options
Selection of Order Routine
Feedback and Evaluation
Do their end-users want this option within
Starbucks locations? If so, the need does exist and
should be considered.
If actions are taken to satisfy this need, what exact
requirements do end-users want, and does
Starbucks have the resources available to meet
these requirements?
Will Starbucks take this idea to open bid, or will
they deal exclusively with a single firm?
Which supplier provides the best organizational fit
with Starbucks?
Utilize a partnership/preferred supplier philosophy,
or take an adversarial approach?
Test end-users satisfaction from the implemented
project. Also, evaluate the supplier relationship;
did they stay true to their promises?

The following marketing implications are from the seller‘s perspective:

Personal Selling: to begin a relationship between the two organizations. Face-to-face meetings will
help facilitate a joint-vision.
Promotion and Advertising: Demonstrations on how the iStation will function will help Starbucks
envision the project. Details and education information that will help guide the decision.

These tools should outline the benefits Starbucks should expect from entering into an alliance.
The promotional section on page 26 will cover the purchasing agents involved by both parties.
However, the assumption is that both firms will utilize cross-functional teams to handle the deal.
COMPETITION
Even though Apple Inc. aims at a niche market, it is still found in the midst of a competitive
technology industry market. The following looks at three major competitors: Dell, IBM and HP. The
focus of this analysis is to understand their corporate vision and see what marketing incentives they
are currently undertaking. As such, our focus is on generic market competition.31

DELL INC.

Established in 1984, Dell is one of the world's largest suppliers of personal computers and related
products32. It is also a leading player in the US and worldwide for notebook computer shipments.33
Despite receding market share to Hewlett-Packard Company in the recent past, in an industry plagued
with intense competition, Dell continues to have a strong market position in the computer hardware
segment.34 Its HQ is located in Round Rock, Texas.

Product Offering

Dell designs, develops, manufactures, markets, sells and supports information technology systems and
services. The company sells to a diverse group of people. Products are sold directly to large corporate,
government, healthcare, and education customers as well as small-to-medium businesses and
individual consumers.35

Dell offers its products in six categories:36

 desktop computers: there are three main types of which each are directed towards a specific segment
o Optiplex: intuitional, government, business
o Dimension: small business
o XPS: entertainment need of individual customers
 mobility products: MP3 players, handhelds and notebook computers
 software and peripherals: printers, computer displays, various software, notebook accessories, networking
and wireless products, digital cameras, power adapters, and scanners
 servers and networking products
 storage products: tape backup products, direct attached storage, network attached storage and storage area
networks

Pricing

Dell has been a pricing leader and is fighting to regain market share. But there are strong signals that
the company will not sacrifice margin in the channel to win that market share back. In its most recent
quarter, Dell reported an increase in product margins specifically because it opted to decrease sales of

31
We do not discuss the product market because work stations, particularly Internet café‘s, are a concept not a brand or
company.
32
Marketline. Dell. June 17th 2007. Retrieved Sept 13 2007. <http://dbic.datamonitor.com>
33
Ibid
34
Ibid
35
Ibid
36
Ibid
lower-margin products. Even though Dell now is selling low-priced desktops at Wal-Mart, the
commercial segment is a different part of Dell's strategy, making a price war unlikely.

Promotion

Dell is moving focus onto its customer service quality in hopes to raise its service levels. The
company's score on the American Customer Satisfaction Index (ACSI) indicates scope for improving
its customer service further. The company's ASCI score improved from 74 in 2005 to 78 in 2006, but
still below that of Apple (83 in 2006) and its own scores of 80 in 2000 and 79 in 2004.37

Dell has been changing their promotional strategy. Traditionally Dell‘s promotional strategy focused
on price or PC features. Their new promotional direction is headed by the tagline "Yours Is Here." It
recently launched a line of laptops in a range of colors; however the company has not been able to
produce laptops in some of the colors customers want most. The reasoning behind this change in
promotional direction is ―If we use color and the fun factor, it offers a whole different value
proposition." Print versions are appearing on venues including buses, subway posters, and taxi tops,
which Dell hasn't used previously. Interestingly enough, Dell's new marketing, while colorful, has a
―me-too‖ feel that merely mimics strategies of competitors, particularly Apple.38

Distribution

Dell has traditionally sold its products directly to consumers, therefore eliminating wholesalers and
retailers. Their direct business model avoided expenditures associated with retail such as inventory
carrying costs, obsolescence associated with technology products, and retail mark-ups.39 It was this
business that made Dell the industry price leader. Furthermore, the model yielded a competitive
advantage as it allowed Dell to introduce the latest relevant technology much more quickly than
companies with slow-moving, indirect distribution channels.40

However, after 23 years, Dell has departed from this model and has begun retailing its products
through Wal-Mart.41 Starting June 10, Wal-Mart will start selling two "exclusive" Dell Dimension PC
builds, both priced at under $700, at its 3,500 Wal-Mart and Sam's Club stores in the US, Canada and
Puerto Rico.42

In an international context, while opening up to retailers, Dell is also attempting to improve

profitability by expending their customer base into growing overseas markets like India and China.43
To further this, they have also begun to move business operations to these markets.

37
Marketline. Dell. June 17th 2007. Retrieved Sept 13 2007. <http://dbic.datamonitor.com>
38
Ibid
39
Perenson, Melissa J. ―Dell Gives Trialware the Heave-Ho.‖ PC World, Oct2007, Vol. 25, Issue 10
40
Marketline. Dell. June 17th 2007. Retrieved Sept 13 2007. <http://dbic.datamonitor.com>
41
Ibid
42
Marketline. Dell. June 17th 2007. Retrieved Sept 13 2007. <http://dbic.datamonitor.com>
43
Ibid
 HEWLETT-PACKARD COMPANY

Established in 1939, Hewlett-Packard Company (HP) is a provider of personal computing and other
access devices, technologies, solutions and services to individual consumers, small and medium-sized
businesses (SMBs) and large enterprises. 44 Few of Hewlett-Packard‘s products compete on a direct
product market with Apple, specifically its consumer computers and workstation goods. This puts HP
in a narrow category placement with Apple, however this specific product group takes much of both
the company‘s R&D, marketing and sales distribution creating much attention and dedication towards
pushing these products onto their product market. Its HQ is located in Palo Alto, California.

Product Offering

Hewlett-Packard is a provider of personal computing, electronic access devices, technologies,

software, services, solutions and a wide array of electronic products world wide:

HP is divided into seven segments:45

 Enterprise storage and servers (ESS): provides storage and server products for enterprises and
SMB markets.
 HP Services: provides multi-vendor IT services, including technology services, consulting and
integration services, and managed services.
 Software solutions: help enterprises to manage their IT infrastructure, operations, applications, IT
services and business processes.
 Personal Systems Group (PSG): provides commercial and consumer PCs, workstations, handheld
computing devices, digital entertainment systems, calculators, and other related accessories, software
and services
 Imaging and Printing Group (IPG): segment offers inkjet printers, digital photography and
entertainment devices, laser jet printers, graphics and imaging devices, and printer supplies.
 HP financial services: help the customers in acquiring IT solutions, including hardware software
and services
 Corporate Investments: includes Hewlett- Packard Laboratories (HP Labs), and other business
incubation projects.

Pricing

Production costs for HP are set to 12.7% of its revenues in 2002.2 The figures show that producing HP
products and service cost a twelfth of what the company makes, which gives it much room for
leverage in raising its promotional and distribution costs. It is important to have this leverage since
much of the high-technical companies need thorough resources in its research and development
departments to stay in par or ahead with its closest competitors.

44
Marketline. Hewlett-Packer. June 23rd 2007. Retrieved Sept 16 2007. <http://dbic.datamonitor.com>
45
Ibid
Distribution

Hewlett-Packard has more than 750 outsourcing customers worldwide which are served from 20
global operations management centers in the United States, Europe, Latin America and Asia-Pacific.46

It sells both directly to the business such as CIBC and Keppel TatLee Bank as well as intermediaries
like Amazon.com. Its other customers include: CIBC, Alliance & Leicester, MCI Worldcom, Lucent
Technologies, Amazon.com, Yahoo!, Sara Lee, Qwest, Keppel TatLee Bank, FTD, Lancer and the
National Gallery. The company also license HP technology to third parties.47

Promotion48

Hewlett-Packard has high brand equity, which is built by its strong promotional and marketing
campaigns.

As part of their promotional tactics, HP uses a wide range of high-profile personalities to attract
consumers. Celebrities they have used included Shaun White, Mark Cuban, Jay- Z, Serena Williams,
supermodel Petra Nemcova and Gwen Stefani. The key attribute advertised in HP advertising is
―innovation‖ and is carried through all product lines.

With respect to targeting to small businesses, they tend to focus on how HP products have helped
entrepreneurs in successful ventures.

46
Marketline. Hewlett-Packer. June 23rd 2007. Retrieved Sept 16 2007. <http://dbic.datamonitor.com>
47
Ibid
48
Ibid
 IBM CORPORATION

Established in 1924, International Business Machines Corporations (IBM) is the world‘s largest
information technology company, engaged in providing business, technology and consulting
services.49 They develop, manufacture and sell hardware and software and offer consultation for big
and small companies. Its HQ is located in Armonk, New York.

Product Offering

The company business operations offer a range of services and technologies which includes, hardware,
software, financing, research and chip technologies.50

They currently operate in the following six sectors:51

 The financial services include banking, financial markets and insurance.
 The public sector includes education, government, healthcare and life sciences.
 The industrial sector includes aerospace, automotive, defense, chemical and petroleum, electronics.
 The distribution sector comprises of consumer products, retail, travel, transportation.
 The communications sector comprises telecommunications, media and entertainment, energy and
utilities
 Small and medium business consisting of companies with less than 1,000 employees.

Pricing52

IBM has decided not to compete on price with companies like Microsoft or Dell. IBM has decided to
base their pricing on value integration saying ―when customers buy a server they don‘t buy a Dell,
they buy a solution. The value is in the software.‖

Promotion53

Currently IBM is the leading provider of IT services. This leading position provides IBM with a
positive brand image and places the company in a competitive position. The company‘s investment
in R&D puts the company at a technological advantage as well. What sets IBM apart from their
competitors is the company‘s ability to innovate and provide globally integrated solutions.

In 2006 IBM launched their marketing communications campaign theme ―What makes you
special‖. This campaign was quite successful as IBM was able to support facilitate their clients‘
innovation programs. An example of how IBM is using its innovative service capabilities to improve
their clients‘ customer service issues. IBM is delivering new wireless, self-service kiosks, with POS
and check out systems. One of the first of these kiosks is the AnyPlace Kiosk that is enabled by a
wireless provider, and placed in locations such as airports and hotels to assist consumers in connecting
to the Internet.

49
Marketline. IBM. June 16th 2007. Retrieved Sept 23 2007. <http://dbic.datamonitor.com>
50
Ibid
51
Ibid
52
www.ibm.com
53
www.ibm.com
Distribution54

 The company operates in over 170 countries across North America, Latin America, Europe,
Middle East, Africa and Asia Pacific.
 IBM's clients include a range of enterprises, from sole proprietorships to the world's largest
organizations, governments and companies.
 The company also distributes its products and services through two categories: internal routes to
market and business partner‘s routes to market. The internal routes to market include services
consultants, hardware and software brand specialists and ibm.com. The business partners routes to
market include global and major independent software vendors (ISVs), global and major systems
integrators (SIs), regional ISVs and Sis, and solutions providers, resellers and distributors.

Market Share Figures 2006

Other
21% Dell
32%

IBM
18%
Apple HP
6% 23%

54
Marketline. IBM. June 16th 2007. Retrieved Sept 23 2007. <http://dbic.datamonitor.com>
ENVIRONMENTAL CLIMATE
Economic Considerations
 The U.S economy, over the last few months, has been in a state of flux. A large part of this is
ultimately due to the decrease in the purchasing power of the U.S Dollar. Due to this
depreciation, inflationary pressures have become evident over these last few months, leading to
a cut-back on consumer expenditure.55
 According to Reuters news agency, ―Starbucks, after reporting a 9 percent rise in third-quarter
earnings on Wednesday, said weakened consumer spending was one reason why customer
traffic at its U.S. stores rose less than 1 percent during the period‖56. This ultimately illustrates
that the current economic situation is at least a part of the ―blip‖ in sales rates and decreased
consumption within the walls of Starbucks Coffee houses around the U.S. Bank of America
Securities analyst Andrew Barish claims that this is the first time ever that Starbucks has ever
admitted that the weak economic situation and tougher competition has led to a decrease in
sales57
 With the U.S economy today being in the situation that it is, it suggests that a decrease in
consumer spending will also have an impact on the purchasing on Apple products. However, in
this situation, there is an opportunity for both Starbucks and Apple to collaborate in hopes to
counter these economic consequences.

Therefore, the current economic conditions in the U.S pose a threat to this collaborative effort between
Apple and Starbucks.

Technological Considerations
The market is characterized by several business and technological pressures, which in turn affect the
hardware market, its related software market, growth, and industry competitiveness. The following is a
list of trends that are changing the technological climate in the US.

 Computers and peripherals have been among the fastest growing markets in the electronics
sector.
 But hardware, via outsourcing, is becoming secondary to software and applications
 The replacement cycle is of great significance to the computer and peripheral markets, and
is helping to drive growth.
 This market‘s nature is ―growth/cyclical,‖ with business cycles amplified by inventory
overhangs.
 More and more, consumer demand drives the PC segment.
 There is significant (and increasing) production in Asia, with major OEM outsourcing.
 Market segments include some specialty areas, e.g. high-performance, technical computers,
storage, peripherals, and embedded computer hardware, where there are opportunities for
customization.
Source: Bishop & Associates Inc. Computer Industry Trends 200758

55
Groom, Nicola. ―Starbucks finding it is not immune to spending blips.‖ Reuters Online. August 2nd 2007.
56
Ibid
57
Ibid
58
Computer Industry Trends. MacWilliams, John. Bishop & Associates Inc. (2007). October 3rd 2007.
MP3 Downloading

Ipsos-Reid findings have shown that more than 20% of all Americans over the age of 12 download
MP3 files online.59 This has been on the rise in the last several years, and Ipsos predicts that it will
continue to rise in the future. In 2006, the research firm found that 27% of music downloads were paid
for. The number increased to 31% in September. This suggests that there are users who will pay for
digital music even though they can download it illegally.

Computer Use

There have been many findings on computer use in recent years, which all lead to the same
conclusion: there is an increasing importance of computers upon the lives of American citizens. To
illustrate their usage, relative to the rest of the world, the United States ranks second highest in terms
of computer use per 1000 people.60 Furthermore, ―Three quarters of all Americans have access to the
Internet, spending an average of twelve-and-a-half hours a week online...for those between 12 and 18,
usage approaches 100 percent.‖ This shows that the internet is dominating the lives of Americans

Social and Cultural Considerations

The personal computer and the Internet have had tremendous impact on society and culture as a whole.
It has been noted that ―home access to computers and the Internet has expanded dramatically over the
last decade.‖61 Specifically, the creation and expansion of computer networks has led to enormous
growth in ―social networks, linking people, organizations, and knowledge.‖ 62 Many computer
scientists regard these networks as social institutions that are ―integrated into everyday lives.‖63

Virtual communities have been formed by people who want to connect globally with others for a
variety of reasons, such as offering and receiving ―companionship, information, and social support
from their homes and workstations.‖64 In relation to work, this trend has also been growing as many
‗white-collar‘ workers prefer to work from home (telework), ―combining employment with domestic
chores…management foresees reduced building and real estate costs, and higher productivity.‖ 65

In the article, ‘From Impact to Social Process: Computers in Society and Culture‘, Paul N. Edwards
states that ―the computer is not only inserted into an organization or a culture, but frequently embodies
particular images of how the organization or culture functions and what the roles of its members
should be.‖ 66 This becomes tremendously important when companies rely on computer and their
mediums to express their corporate goals.

59
Ipsos-Reid: More Americans Taste Tunes on Net. Mp3newswire.net. Menta, Richard. 2006-12-07. 2007-10-03.
60
Computer Almanac: interesting and useful numbers about computers. Brad A. Myers (2005.08.07). 2007.10.03
61
Nation Online: How Americans are Expanding their use of the Internet. February 2002.
<http://www.ntia.doc.gov/ntiahome/dn/nationonline_020502.htm>
62
Wellman, Barry et al. ―Computer Networks as Social Networks.‖ Centre for Urban and Cultural Studies. 1996.
www.chass.utoronto.ca/~wellman/publications/computernetworks/computernetworks2.pdf
63
Ibid.
64
Ibid
65
Ibid.
66
Edwards, N. Paul. ‘From Impact to Social Process: Computers in Society and Culture‘, pg. 32, 1994.
There is a growing attachment to computer hardware, and more specifically computer brands. For
example, Dell‘s newest campaign is ―Your‘s is Here‖ demonstrating the attachment people have to
brands. People look onto computer products as a way to help define themselves and social status.
Another example of this is the ‗cult-like‘ behaviour associated with Apple brand fanatics.

Internet Access

The majority of households have personal computers and Internet access. In 2003, 70 million
American households, or 62 percent, had one or more computers, up from 56 percent in 2001.67
Nearly 9 in 10 adult Internet users (88 percent) used the Internet to send or receive e-mail, and nearly
8 in 10 (78 percent) used the Internet to get information on products or services.68

The Internet is also changing interpersonal communication; more than half (55 percent) of all adults
used e-mail or instant messaging in 2003, compared with 12 percent of adults in 1997.

Political Considerations

U.S. government is starting to place higher emphasis on environmentally friendly computer hardware.
This has forced many companies to redesign components. The environmental performance criteria are
divided into the following categories:
Energy conservation
Packaging
Elimination of sensitive materials

67
Day, Jennifer C. et al. Computer and Internet Use in the United States. Issued October 2005.
68
Ibid.
RECOMMENDATIONS

Mission Statement

Apple Inc. is committed to the designing, manufacturing, and marketing of personal computer systems
and the portable digital music experience through its innovative hardware, software, peripherals,
services and Internet offerings. 69 By building up a long-term mutually beneficial relationship with
Starbucks Corp., Apple Inc. intends to penetrate a broader market, enhance the overall brand
awareness, and increase market share of personal computing products.

Marketing Objectives

1. Aggregate the total sales of Apple products, and therefore increase profitability.

2. Increase market share, within the PC industry, through indirect promotional and co-branding
strategies with Starbucks Corporation

3. Create a touch-point to increase awareness of Apple computer products

4. Establish and grow a mutually beneficial and profitable relationship with Starbucks Corporation

69
―Company background‖ p7. Form 10-K, 2006. Apple Computer, Inc. UNITED STATES SECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549
 PRODUCT STRATEGY

A Note on Targeting Strategy

The previous discussion on Starbucks outlined why, in a strategic light, the proposition makes sense
by highlighting key, descriptive dimensions of Starbucks Corp. Thus, the target audience of this
initiative is Starbucks, and the plan has been written with this prospect in mind. From a more holistic
viewpoint, we may want to consider what this initiative means to Apple Inc as a whole.
Apple Inc. operates within various industries and thus it can be cumbersome to define all
industrial and consumer target segments. Appendix 3 shows how this proposed initiative would be an
entirely new segment for Apple, and also shows other important segments currently being served by
Apple. Apple Computers falls under various NAIC codes due to the wide range of product and
services it provides. These include the following:

 NAIC: 334111 Electronic Computer Manufacturing

 NAIC: 334119 Other Computer Peripheral Equipment Manufacturing
 NAIC: 511210 Software Publishers

What is an iStation?
iStation Experience & Benefits

The product that we at Apple Inc. plan on marketing to Starbucks is the Apple iStation, which is
ultimately a bundle consisting of a combination of popular Apple computer products. Each bundle will
include the iMac and iMac Pro desktop computers, as well as the MacBook and MacBook Pro
notebooks, all of which are equipped with Mac OS applications and software including Apple iTunes
(a total of four (4) items). These products have been selected so that consumers will be able to test and
each of them, thereby increasing both Apple‘s brand awareness customer satisfaction for Starbucks.

With the introduction of the iStation, Starbucks stores will enhance the Starbucks ―experience‖
for consumers and patrons in a few ways. Firstly, the iStation will provide entertainment for
Starbucks‘ customers, where they can access various mediums and prolong their visits which may
ultimately lead to repeat purchases and sales of Starbucks products. Secondly, iStations will create a
sophisticated atmosphere, enhancing the brand image of both Starbucks as well as Apple in this co-
branding strategic alliance. Finally the iStations will increase customer convenience as they will have
access to both a PC and internet in a comfortable atmosphere.
iStation Layout/Logistics/Design

The iStation will be set up in a strategic and logistically feasible manner; however, due to the
varied sizes of each Starbucks location, a customized approach for the iStation layout will be best.
After a logistical evaluation, Apple will take the necessary steps in strategically setting up each
iStation to the specifications and preferences of the Starbucks managers to fit their unique needs.

iStation Servicing

Apple will provided technical support to Starbucks where Apple‘s IT personnel will attend to any
technical issues that may arise throughout contractual period. The experts will make routine visits to
each store to maintain the optimal performance of the iStation, to make sure that each component is
working properly, and to make any software and/or hardware upgrades developed by Apple Inc. Such
upgrades will include the computers themselves. The servicing component of the iStation bundle will
act as an incentive for Starbucks as it eliminates much of the time and financial risks involved in this
type of business relationship.

iStation Components: The iStation will consist of different hardware pieces from the iMac desktop
and Macbook product lines. It will come with the latest Mac OS operating system with fully installed
basic programs such as iLife and Quicktime. The iStation will be fully navigated and monitored by
McAfee Spyware and virus protection programs. Many of Apple‘s programs such as Final Cut
Express HD 3.5, Logic Express 8.0 as well as all the latest Adobe program sets (Flash, Photoshop,
Dreamweaver) will be available for use. These software upgrades will offer users to edit photos,
videos, music, websites and more to create compatibility and correlation of the total well-roundedness
image of the iStation. Having 2.66Ghz speed and 4Gbs of RAM, will make certain that work and play
on the iStation will be quick and easy from application to application.

Actual Product

Desktop Computers: iMac® 20” and 24”

iMac Pro Software70

 Mac OS X v10.4 Tiger (includes Spotlight, Dashboard, Mail, iChat AV, Safari, Address Book,
QuickTime, iCal, DVD Player, Final Cut Express HD 3.5, Logic Express 8.0, Xcode Developer
Tools)
 Adobe: Premier, Dreamweaver, Photoshop, Flash
 iLife ‘08 (includes iTunes, iPhoto, iMovie HD, iDVD, iWeb, GarageBand), Microsoft Office 2004
for Mac Test Drive, iWork ‘08 (30-day trial)
 Front Row, McAfee Spyware/Virus Protection

Laptop Notebooks

MacBook™ MacBook™ Pro

Augmented Product

Product Modification

All skins of programs will be customized to suit an exclusive style only found in Starbucks on the
iStation. The physical aspects of the iStation such as the 17‖ flat panel LCD monitor, hard box and
small accessories can be color coordinated to fit Starbucks‘ image. The keyboard keys will be under a
tight-sealed plastic cover that will prevent damage from foods and spills. The mouse will not be
wireless to avoid leakage and replacements costs. A webcam, microphone and earphones will come
standard in all iStations so users will be able to take photos and videos of themselves and
communicate with friends and family. Finally, iTunes Store will appear as the homepage whenever
Internet Explorer will be opened.

Example of Software Modification:

On the next page it is shown how the iTunes software can be personalized to generate greater value for
Starbucks. The homepage will feature artists and albums that are distributed by the Starbucks record
label, Hear Music.

70
http://www.apple.com/macbook/specs.html
 Apple and
Starbucks Logo Green
Placement Background

Featured
Starbucks
Music and
Artists

Positioning and Differentiation

How does an iStation differentiate itself from other similar services? That is, how do they differ from
the typical wireless Internet station? The following diagram demonstrates what dimensions both firms
would bring in sculpting the position of the iStation.

Apple Starbucks
Computers
Experience Based
Attribute Based A third ‘home/place’
Sleek, Modern, Cool

iStation

Thus, the proposed iStation will position itself as a modern, sleek workstation with a comfortable,
home-like setting.

Points of Differentiation

1. Up-to-date trendy computer hardware [Artistic]

2. Different than the typical computer hardware [Apple is rarely used]
3. Personal, ‗warm‘ social setting that facilities work stations with food, snacks and beverage
[Typically, not done]
 PRICING STRATEGY
Given that Apple Inc. is initiating this alliance, it is reasonable for Apple to pay for the cost of
hardware and servicing elements of the iStation. This would mean that Apple would view this alliance
as an investment. As a result, this scenario does not provide upfront, measurable profit from
Starbucks. Essentially this strategy is a hybrid model of the base-cost method and accommodative
negotiation.

Pricing Objectives
1. To strengthen the relationship between Apple and Starbucks.
2. Attract more loyalty customers through Starbuck‘s social networks.
3. Focus on market penetration and brand promotion rather than increasing up-front profitability.

The following lists the investment values that Apple will incurs by setting up iStations in various
Starbucks locations.

Items to be covered Cost71

by Apple Inc
iMac 24‖ 2.8 GHz 1600.00 72
iMac 20‖ 2.4 GHz 1050.00
MacBook Pro 17‖ 2.16 GHz 1,900.00
MacBook 13‖ 2.16 GHz 1,050.00

$5600.00

Variable Costs

Post-Purchase Costs: Repair and Maintenance

This cost is not quantifiable as it is highly variable and circumstantial.
Justification: This should be included in our service to Starbucks as a way to sustain a relationship
between Apple and Starbucks.

Transportation Costs: Initial Installation

Apple does not currently have a labour force that works with installation of computer systems.
However to better the service component we will include transportation costs within the pricing
strategy to better customer satisfaction and increase the value of the proposition.

A note on upgrades: Given that the title of the goods remains with Apple, when a new product model is
set to release, Apple can take the new model into Starbucks locations. Because title of products is
Apples, Starbucks will not be expected to cover the cost of new hardware. All new models will come
with equivalent software and customized preferences.

71
USD. PC prices are taken from online Apple Store, as of Oct 28 th2007. http://store.apple.com.
72 Laura Heller. Apple positions retail store to take bite out of PC sales. DSN Retailing Today. New York: Oct 22, 2001.
Items to be covered by Starbucks
The hardware components may be included to further enhance the visual appeal of the iStations to
end-users. However, since these are add-ons, and not normal components to Apple PC‘s, they are
optional and paid for by the purchaser. They are also one time costs.

CUSTOMIZED FEATURES
1. Specialized Software: Starbucks iTunes homepage
2. Green Computer Monitors

Negotiation Terms:
To be paid in one lump sum at the start of production. Price for customized features will be based on
basic costs associated with production [labour and parts] and percentage compensation.

Design Elements

Given that Apple brand is synonymous with visual appeal, the look of the iStations should be
desirable, and match both the retail ambience of Starbucks and the sleek, modern appeal of Apple.
Because Starbucks is the purchaser, they will collaborate with Apple to design the placement of
stations and handle the procurement of the necessary furniture to set up the stations. Furthermore, this
allows Starbucks greater control of their in-store ambience, which is a key strength they posses.

Physical Elements and Costs

 Tables/ Table tops to rest the hardware on

 Chairs versus standing. Do they want people to stand, or would they rather an environment that
lets people sit?
 Miscellaneous: Starbucks will incur any work that needs to be done within the retail store, to
accommodate the proposed iStations. This amount is subject to analysis from Starbucks
Corporation based on the feasibility of implementing the initiative in desirable locations.

Price Controls
Under this pricing model, Starbucks must agree to keep the iStations within designated retail locations
for 18months.

Disposal Costs
When the initiative has been terminated, Apple Inc will claim responsibility in the removal of the
hardware. This is mainly because title to the hardware is still Apple‘s.
Costs associated with the termination of the project, outside of the removal of hardware, will incur by
Starbucks. This cost measure is not quantifiable at this moment as it is highly variable.

End-Users will not pay anything for use of the iStation.

 DISTRIBUTION STRATEGY
Apple Inc will install iStations at each selected location and work with Starbucks to create
custom display and layouts that are favourable to both parties. This allows us to ensure that our
products and image are being maintained in the strictest of fashion.

The project will require a direct distribution channel to do business only with one company.
We believe that it will be necessary to create a distribution channel that allows us to be as close to
Starbucks as possible. Eliminating go-between parties permits us to focus on meeting the interests of
Starbucks—achieving higher service levels.

Channel Behaviour

As the initiator of the business proposition, it is necessary for Apple to be the channel leader.
In exchange for this, Apple will offer Starbucks a reduced risk and effort as we will install and
maintain the iStations, as well as analyse the findings of the project to determine its success or failure.
For this reason, we are proposing to create a contractual channel, which is tightly coordinated by
formal procedures and pledges of on-going exchange between both parties.

Channel Design

The business relationship we wish to create involves a unique channel design, because there
will only be one company with which to do business. In understanding the customer‘s requirements,
we have assumed that Starbucks will require us to manage most of the logistical needs of this project.
Apple’s responsibility of logistics is an incentive for Starbucks.
Because this proposed business opportunity involves only Starbucks, there will be a direct
distribution channel. The reason for the direct distribution channel will be to keep the manufacturer
and customer at close proximity with one another, so that the manufacturer will be able to reduce the
high costs of logistics in order to maintain superior service.

Apple Computers Inc. – Starbucks Direct Distribution Strategy

Apple Computers Inc.

(Manufacturer)

Starbucks Inc. Starbucks Inc. Starbucks Inc.

(Industrial Consumer) (Industrial Consumer) (Industrial Consumer)
Location A Location B Location C…x
Channel Service Outputs
Customer Training
Once the iStations are installed, Apple will ensure that Starbucks‘ staff will receive the appropriate
training required to use the iStations. Customer training is not meant to make Starbucks‘ employees
experts, as Apple will provide technical support for complex issues. Nonetheless, some initial training
is required for basic operation of the iStations.

Post Purchase Service Response

Once the iStations are installed, Apple will assume the responsibility of service and maintenance. By
incurring this cost, Starbucks‘ is provided with another incentive to accept this proposal, as it will not
interfere with their business model, or core competencies. Third party companies that are located
within the region and/city of the iStations will handle the technical support. This will allow for speedy
and prompt maintenance issues. Furthermore, Apple does not currently have a division in place for
such tasks.

Physical Distribution and Logistics

Apple will be responsible for the physical distribution of the iStations. The nature of the business
relationship between Starbucks and Apple does not require order processing. With respect to the
physical distribution, the important factors pertain to delivery timing and product installation.

Delivery Timing
To meet the needs of Starbucks, Apple will offer convenience by delivering the iStations before or
after hours so that it does not affect Starbucks customers, or store traffic. Giving Starbucks the
authority to decide what time would be best to have the iStations delivered, which assists in reducing
any potential channel conflicts. Seeing as Apple Inc is not a transport company, a responsible and
trustworthy third party will handle the physical movement of the products; most likely one that is
already working with Apple Inc.

Product Installation
Additionally, Apple must be able to install the iStations, in a timely manner based on the expectations
of Starbucks. It is fairly predictable that Starbucks will require a relatively short time frame for
installation so that it does not affect Starbucks‘ primary business. This again will be crucial in order to
avoid channel conflicts and will be an added incentive for Starbucks to select Apple as a business
partner.

In terms of warehousing, the necessary components will be delivered to either the store so that when
the hired technicians arrive, all components are already on site.

Which Locations
Initial Phase
In the preliminary phase of the launch, Apple has decided to install iStations in the United States. The
first locations will be in Seattle, situated close to Starbucks‘ headquarters. If the launch is successful at
the locations in Seattle, then Apple will continue installations in other cities in the United States. By
locating the initial installations in Seattle, it gives Starbucks the opportunity to evaluate the potential
success of the business proposition. Given that, Seattle will have four locations with the iStation.
Secondary Phase
If successful in the first phase, and is given the opportunity to expand, there are approximately
10 potential city centres where Apple would like to install iStations. Starbucks will most likely choose
the specific stores locations. With respect to locales, the suggested locations that Apple believes would
be successful are:

Seattle, Washington
San Jose, California
San Francisco, California
Los Angeles, California
San Diego, California
New York, New York
Las Vegas, Nevada
Philadelphia, Pennsylvania
Boston, Massachusetts
Indianapolis, Indiana
Figure 3: A Company Owned Starbucks
Location
With respect to store type, the iStation will only be brought into Starbucks locations that are
isolated, company owned stores. This is because they allow for a roomier atmosphere to facilitate the
stations. Figure 3 illustrates the inside of such a location

Appendix 5 illustrates the potential Starbucks‘ locations. Based on these locations, Apple will
propose that approximately 20 Starbucks‘ stores will be equipped with iStations. The locations will be
chosen based on proximity to the downtown core, educational facilities, business centres and public
transportation. By selecting these locations, it would be likely that Starbucks‘ will benefit from
increased foot traffic. Additionally, within each city, only one or two Starbucks locations will be
equipped with iStations.

Implementation

Initial Phase
Seattle Locations
4 Company Owned Stores
6 months before secondary Satisfactory Results?
phase
Collect data. Work out kinks
Suggested start date: April 2008
Secondary Phase

Above mentioned cities

2 locations, company owned

Minimum 18months
 PROMOTIONAL STRATEGY

Apple Inc‘s promotional objectives are to increase brand awareness and build Apple‘s brand image. In
turn, the proposed alliance with Starbucks will stimulate demand for their products and services; to
generate sales from end-user customers through a synergetic alliance with Starbucks. By placing
iStations in Starbucks locations Apple will be stimulating demand for their products. These objectives
will be met by promoting Apple products through the following promotional communication mediums:

 Personal\Missionary Selling
 Co-operative Advertising
 Promotional Giveaways

PERSONAL/MISSIONARY SELLING______________________________________

Teams/Responsibilities

Apple will form a cross-functional sales team for the purpose of creating a strategic alliance with
Starbucks. Because our sales target is Starbucks, there is no need for a large sales team. A smaller and
more focused sales team will aid in keeping costs down, and enable Apple to strengthen relationships
with Starbucks.

The team‘s main duties include, but are not limited to, introducing the product, creating interest,
explaining features and benefits, and most importantly building and maintaining relationships with our
potential clients. We believe that a cross-functional selling team will enrich the seller-buyer
experience and cultivate positive long term relationships. A cross-functional team will also be able to
convince Starbucks‘ potential buying centre, by influencing their decisions, and justifying why the
iStation is a worthwhile a risk.

Tools/Selling Aids

As stated, the cross-functional team will aid in fostering the new client relationships via their
professionalism and expertise. Apple will supply each sales team with a variety of material so as to
better sell the iStation and the corporate culture of the Apple – as a brand that is innovative.

 Sales team educational and training program

o Detailed catalogues
o Product knowledge sessions

 Implementation suggestions
o Information technology
Promotional Incentives____________________________________________________

In additional to the direct selling strategy that Apple will be employing, there are some additional
promotional incentives that Apple will propose to Starbucks. These tactics will influence Starbucks to
select Apple as a strategic partner.

 A suggested floor plan design

o Taking into consideration the typical Starbucks layout and the incorporation of the iStation
into the Starbucks environment
 Servicing
o Providing support and service to Starbucks

 Exclusive rights to the iStation

o Agree to use only Starbucks as a channel to tap into lucrative coffee industry

 Exclusive media content available only via the iStation

o Music tracks from Starbucks music label available for download via the iStation for a
limited time - creating media coverage and public awareness

 Email contact information specific to the Apple-Starbucks deal

o Provided by Apple for the first year of operation – answering product and service related
questions/concerns. Helmed by Project Manager.

CO-OPERATIVE ADVERTISING_________________________________________

Because both Apple Inc. and the Starbucks Corporation stand to gain form the iStation, efforts will be
taken in developing strategic co-operative advertising campaigns.
By emphasizing both the Apple and Starbucks brands, the advertising teams will create mutually
beneficial ads, promotional material and displays that will spark product interest and excitement
throughout the year. These advertising measures focus on stimulating end-user demand. These
campaigns may include the following:

 Regional Newspaper ads: Lifestyle and Entertainment section

 Design/artistic team integration

o Creative advertisements, signage and various media developed in partnership with
Starbucks. These include POP displays and posters, to be featured in Starbucks locations.

 Online advertising and promotions via the Apple website.

 Outdoor Advertising
o Public transit ads
PROMOTIONAL GIVEAWAYS___________________________________________

To persuade Starbucks to commit to the iStation and to attain full cooperation from their
marketing and executive group, Apple will provide various giveaways so as to aid Starbucks in
retaining their valued and loyal customers. Again, in doing so, Apple hopes to develop a strong
relationship with Starbucks as they provide a powerful new touch point for Apple customers.

Apple will also benefit from these giveaways by making use of the customer information made
available through the customer loyalty program. Analyzing the data, Apple may better understand
customer purchase behaviour at various seasons and the behavioural triggers that follow. This wealth
of knowledge will be a key asset to Apple‘s future as they try to tap into new segments while retaining
valued customers.

Some of these promotional giveaways are;

 Exclusive digital music releases via the iStation

o e.g. debut albums, songs, remixes

 Free music downloads with seasonal promotional points campaign

o Redeem your Apple cash-points via the iStation and choose from a variety of music
genres
o Accumulate greater amounts of points and receive extra discounts on Apple
products.

Appendix 4 provides promotional budget information broken down by promotional category.

What is the iPoints Rewards System?

The iPoints Rewards feature is a system in which Starbucks consumers can accumulate points
by purchasing mp3‘s via the iStation (iTunes). Besides being customized to fit the image of Starbucks,
iTunes will come equipped with the added feature of iPoints Accounts. iPoints accounts can only be
accessed through the use of the iStation, since the iTunes store has no such feature. This will act as an
incentive for consumers to frequent iStation based Starbucks locations to further accumulate points.
By signing up for an iPoints Rewards Account, customers will be asked for their names, zip codes, and
e-mail addresses so they can receive promotional codes once they accumulate enough points to redeem
for their rewards.
 How does the iPoints Rewards System work?

Once the customer fills out the information, they will be asked to choose a username and
password which will allow them to log-on every time they use the iStation. Once logged-on, the
customized iTunes store will be displayed; this includes the ―My iPoints Account‖ which keeps track
of the accumulated points received over the course of usage, and will notify the user whenever he or
she has collected enough points to be redeemed for rewards. For every mp3 purchased from the iTunes
store (via the iStation), one iPoint will be rewarded and stored in the ―My iPoints Account‖ page. This
notifies the user of their status and lets them know how many iPoints they currently have. The amount
of iPoints rewarded, however, will depend on whether or not promo days are in effect.

Throughout the course of the iStation trial period, there will be ―double-points‖ days where
iStation users will be able to receive double the iPoints for every purchase of an mp3. Once enough
accounts have been created, we expect that these promotional days will increase foot-traffic in
participating Starbucks locations, and thus increase sales for those days. Once an iStation user has
accumulated enough iPoints, they will be notified in their ―My iPoints Account‖, which will also
provide them with a promotional code which will include all of the necessary information regarding
the redemption of iPoints.

iPoints Reward List

The following is an example of iPoints table, which illustrates how many points are needed to
qualify for particular rewards.

Points Reward
50 1 Free Song Download from iTunes
1500 10% off of a Macbook
2000 10% off of a iMac

Stored
iPoints
Information
FINANCIAL STATEMENTS

Cash Outflow Analysis

The following will outline all cash flows to be incurred by Apple Inc in bringing this initiative into
launch.

Expenses
Hardware Costs:73 With a bundle costing approximately $5,600, given that the stations will be placed
in 10 (ten) cities, with two locations the total hardware cost would be $5,600 x 2 x 11 74 = $123,200.
This is the basic production cost incurred by Apple.
$ 123,200
Post-Purchase Costs:
Repair and Maintenance and Installation to be handled by a third-party computer technician company;
this team will be contracted for 18 months.
$ 81,000
Distribution Costs:
Transportation: Based on rates from FedEx; a third-party delivery company that will ship computer
hardware to all 20 locations.
$ 7,060
Direct Marketing Costs
 Sales team educational and training program: $ 1520.00

Co-operative Advertising

 Regional Newspaper ads: Lifestyle and Entertainment section $ 277,500

 Design/artistic team integration (POP In-store) $6,100
 Online advertising and promotions via the Apple websites $4,500
 Outdoor Advertising: Transit $2611.50

Other Expenses:

Administration Expense:
One individual will be hired to handle the project and organize the cross-functional team to coordinate
the operation. We include the salary for a New Product Manager and make the assumption that the
sales team will be made up of current Apple employees.
$ 69,000

Miscellaneous Expense:
We include a small amount of money for unforeseen costs. This is highly variable. $ 10,000

Total Expenses: $ 582,491.50

73
We do not include costs associated with customized hardware as these are extremely variable and hard to estimate. Also,
customized hardware features are not mandatory. This cash outflow statement shows all basic, mandatory costs.
74
11 is used and not 10 given that Seattle will get 2 more iStations [ total of 4].
Break Even Analysis

With respect to the information listed above, the following is a break-even analysis for the proposed
plan.

From the cash flow analysis, the total expenses to be realized is $ 582,491.50

Product Base Cost Retail Cost Contribution

Margin75
iMac $1600 $2080 $480
iMac $1050 $1365.00 $315
Macbook Pro $1900 $2470.00 $570
Macbook $1050 $1365.00 $315

Break Even Expressed in Units by Product Type [in isolation]

iMac = $ 582,491.50 = 1,214 units iMac= $ 582,491.50 = 1,850 units

480 315

Macbook Pro = $ 582,491.50 = 1022 units Macbook = $ 582,491.50 = 1,850 units

570 315

Cost per Customer

We can also show the cost spread across the potential reach of 5,077,358 people, giving us a cost per
customer.

Cost = __$582,491.50 = $0.1147 /end-user.

Reach 5 077 358 people

Or

Reach = 5 077 358 people = 8.7162 people/ dollar spent.

Cost $582,491.50

75
30% Profit Margin assumption per unit.
APPENDIX
Appendix 1: New Store Growth Data for Starbucks

Net stores opened

during the fiscal year Stores opened as of
ended
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
2006 2005 2006 2005
United States (1) 810 580 5,728 4.918
International:
United Kingdom 47 45 514 467
Canada 74 62 508 434
Thailand 22 14 85 63
Australia 25 14 83 58
Germany 24 9 68 44
China 14 18 38 24
Singapore 5 -3 37 32
Puerto Rico (1) 6 5 17 11
Chile 6 1 16 10
Ireland 7 1 8 1
Total International: 230 166 1,374 1,144
Total Company-Operated 1,040 746 7,102 6,062
Source: Starbucks Corporation. 2006 Annual Report - Financials
(1) International store data has been adjusted for the acquisitions of the Puerto Rico and Hawaii
operations by reclassifying historical information from Licensed stores to Company-operated stores.
United States store data was also adjusted to align with the Hawaii operations segment change by
reclassifying historical information from International Company-operated stores to the United States.
Appendix 2: Financial Statements and Supplementary Data
Consolidated Statement Of Earnings
In thousands, except earnings per share

FISCAL YEAR ENDED Oct 1, 2006 Oct 2, 2005 Oct 3, 2004

Net revenues:
Company-operated retail $6,583,098 $5,391,927 $4,457,378
Specialty:
Licensing 860,676 673,015 565,798
Foodservice and other 343,168 304,358 271,071
Total specialty 1,203,844 977,373 836,869
Total net revenues 7,786,942 6,369,300 5,294,247
Cost of sales including occupancy
3,178,791 2,605,212 2,191,440
costs
Store operating expenses 2,687,815 2,165,911 1,790,168
Other operating expenses 260,087 197,024 171,648
Depreciation and amortization
387,211 340,169 289,182
expenses
General and administrative expenses 473,023 357,114 304,293
Subtotal operating expenses 6,986,927 5,665,430 4,746,731
Income from equity investors 93,937 76,648 58,978
Operating income 893,952 780,518 606,494
Interest and other income, net 12,291 15,829 14,140
Earnings before income taxes 906,243 796,347 620,634
Income taxes 324,770 301,977 231,754
Earnings before cumulative effect of
581,473 494,370 388,880
change in accounting principle
Cumulative effect of accounting
17,214 — —
change for FIN 47, net of taxes
Net earnings $564,259 $494,370 $388,880
Appendix 3: Apple Segmentation Chart

The following provides a look at the current customer segments served by Apple Corp. Also shown is
the suggested segment that Apple adds to its customer profile. Essentially, the proposed plan adds
entirely new customer segment to the chart.

Currently Served Proposed

New
Segment
Education Profession – Independent Advertising WIRELESS
Industry Specific Retail Chains Agencies WORK
Shops STATIONS
PC Software Yes Yes Yes Yes YES

Internet Yes Maybe Yes Yes YES

software and
services

PC’s Yes Maybe Yes Yes YES

Notebooks No Maybe Yes Maybe YES

Music Software No No Yes Maybe YES

Digital Music No No Yes No MAYBE

Players

Mobile No No Yes No NO
Products

Professional Maybe Yes Maybe Yes MAYBE

application
software
Consumer, Yes Yes Maybe Yes MAYBE
education, and
business
oriented
application
software
HD Display No Maybe Yes Maybe NO
Appendix 4: Promotional Budgetary Issues

Co-operative Advertising Costs76

Newspaper Ad Costs
Newpaper costs vary greatly across cities; the following uses the cost of a newspaper ad in the
Vancouver Sun.

The Vancouver Sun

Saturday Edition/ Arts and Leisure
Colour Full Page Ad
Drops: 6
Cost: $7,708 + 25% for section preference = $9,250
http://www.png.canwest.com/rates.html

Total Magazine Costs = $9,250 x 6 x 10 = $555,000

Transit Media Costs

Interior and exterior bus panels within the focal cities; 4-week period at the launch of initiative.
Interior: full showing $185.40
Exterior: $336.90
Dimensions: 9.5"HX16.75"W Interior 17"H X 22"W Exterior

Total Transit Costs: $ 522.30 X 10 = $5223.00

Internet Costs

Banners:
Side/Wide: 200,000 Impressions. CPM: $30  $6000
Top/ Leaderboard: 150,000 Impressions. CPM: $20  $3000

Point of Purchase Media

Estimated number of retail outlets: 20

Period of 18 months

Posters  2‖ X 3‖
Banners  6‖ x 4‖

Posters  3 per store  $ 70  $70 x 3 x 20 = $4,200.00

Banners  2 per store  $ 100  $100 x 2 x 20 = $8,000.00

76
On the cash outflow statement these numbers are divided into half, as only half is paid for by Apple Inc.

No Limits
Sales team educational and training program costs

The following outlines associated costs with direct marketing initiatives for the sales people who deal
with Starbucks. Solely Apple will incur this.

Business Cards $19.99 per

25077
Company Binder $15.00
Product Catalogue $30.00
Price List Binder $10.00
Quick Reference Brochure (B&W) $20.00 per 100, 20 cents each

TOTAL (Per 20 Cities) ($76.00 x 20) $1520.00

77
http://www.staplescopyandprint.ca/images/r_me_re_PriceListOct2007_e.pdf
Appendix 5: Existing, Possible Locations
Exhibit 1 – Existing Starbucks Locations Seattle, Washington

Exhibit 2 – Existing Starbucks Locations San Jose, California

Exhibit 3 – Existing Starbucks Locations San Francisco, California

Exhibit 4 – Existing Starbucks Locations Los Angeles, California

Exhibit 5 – Existing Starbucks Locations San Diego, California

Exhibit 6 – Existing Starbucks Locations New York New York

 Exhibit 7– Existing Starbucks Locations Las Vegas Nevada

Exhibit 8 – Existing Starbucks Locations Philadelphia, Pennsylvania

Exhibit 9 – Existing Starbucks Locations Boston, Massachusetts

Exhibit 10 – Existing Starbucks Locations Indianapolis, Indiana

 Name Student Number
Ali, Mohad 206614275
Ferdinands, Jennifer 206845408
Leiberman, Shane 206524334
Poon, Emily 208801177
Ricchio, Ralph 206653174
Rolo, Miguel 205906748
Tang, BeiBei 208104374
Uzlaner, Leo 207402266