Executive summary

Starbucks was a Seattle-based coffee roaster in 1971. During the 1970’s and 1980’s

with the demand for specialty, high-quality coffee bean increased, Starbucks spread

the gospel of high quality, customized coffee drinks to urban areas around the States.

The Starbucks fans helped the company grow its revenues from $10 million in 1988

to more than $1.3 billion in 1998. By 2007, the coffee company earned $9.4 billion in

revenues through a network of more than 15,000 shores worldwide.

As the time goes by, Starbucks changed its mission statement from: “To establish

Starbucks as the premier purveyor of the finest coffees in the world while maintaining our

uncompromising principles as we grow.” to “To inspire and nurture the human spirit – one

person, one cup and one neighborhood at a time.”

Starbucks keeps growing rapidly with its high quality coffee, variety beverages

selections, unique Starbucks experience and its efforts to balance profits with social

and environmental responsibility. These are the Starbucks’ core according to the CEO

Howard Schultz. These have always been, and will always be the core competencies

of Starbucks.

In the current coffee market, there are more rivals than ever before, and more entrants

are joining in. The competition is more intense. And the expectations from the public

are not only focus on Starbucks financial performance but also on its CSR. Can

Starbucks do as well as before without modifying its organization structure, operating

1
process and business strategies? It is time to make a decision.

Corporate mission

On Starbucks website, it says: Our mission is to inspire and nurture the human spirit –

one person, one cup and one neighborhood at a time. Starbucks sells coffee, and it

involves in every aspects of coffee industry, from coffee beans grow, harvest,

selection to brew to make sure the coffee customers buy in any Starbucks taste the

same, to make sure when people smell the aroma they can identify its Starbucks.

Besides the coffee, Starbucks also interact with its partners and customers. To

partners, Starbucks is such a reliable friend, colleague. They respect each other, to

create a win-win situation. To customers, Starbucks communicate with them with

genuine smiles and home experience. Starbucks is a haven to stay long.

At last but not least, Starbucks concerns the neighborhood, community, society and

the world environment. It commit to the society to be a responsible corporate citizen.

“You don’t do these things for recognition, you do these things because they are the

right thing to do.” said Schultz. “It is time to get back to the core and make the

changes necessary to evoke the heritage, the tradition, and the passion that we all have

for the true Starbucks experience”.

Industry structure

The specialty coffee market in America just began when Schultz started to build

Starbucks chains in the late 1980s. But the coffee market increased rapidly at the end

2
of 20th century. Major companies include Starbucks, Dunkin’ Donuts, Caribou, Coffee

Bean and Tea Leaf, and Diedrich (Gloria Jean’s). The industry is highly concentrated

at the top and fragmented at the bottom: the top 50 companies have over 70 percent of

industry sales (Kauffrau, 2007). Many factors boosted the coffee industry boom. The

optimistic economy is one of them. Customers have greater purchasing power when

the country becoming rich. Customers do not have to make a budget to enjoy a

specially prepared coffee drink. Coming with the increasing incomes, people became

health conscious, they started to pursue better quality life. Organic foods, fine wine,

brewed coffee, etc. Consumers taste and personal income drive demand. Where there

is demand, there is supply. According to Kristin Dizon’s study, by the end of 2006,

there were nearly 24,000 coffee shops in America. 75% of the sales come from

Starbucks (Kauffrau, 2007). There is no doubt that as a market leader, Starbucks

encounter intense competitions from rivals. They are fighting for new customers,

premium locations, and overseas markets. But overall the industry is saturated, settled

and stable which allows almost all of the competitors to yield very good margins.

A significant driver in the coffee shop industry is growth in the form of domestic and

international expansion. According to the Starbucks’s 2007 corporation report, there

were 15,011 stores worldwide, 10,684 were in domestic market. Starbucks, for

example, opens on average three stores a day and has already made significant inroads

into countries like Japan, China, the UK, Australia, the Middle East and Latin

3
America. Such expansion is considered the number one growth driver for the

company which plans to grow from 12,000 stores to 30,000 stores in 10 years (Moon,

Y & Quelch, J, 2006).

The second industry driver is innovation. When customers walk into a Starbucks, they

are faced with a plethora of options, covering food and beverage products. It offers a

wide variety of coffee, juices, teas, baked food, snacks, cups, mugs and even

Starbucks music, books and movies. Starbucks is not just selling coffee, but also

selling Starbucks-branded items. The broader selection brings more revenue. Beside

products innovation, Starbucks was keen on innovate its service. Starbucks introduced

pre-paid card and gift card to customers. It tightens the link between Starbucks and its

customers. Schultz has called this innovation “the most significant product innovation

since Frappuccino.” At the same time, Starbucks pays lots attentions on the in-store

experience. It is a cozy place for people to hang-out, chit-chat and even work.

Starbucks emphasizes the communications between barista and customers. So that

this industry is increasingly impacted by consumer’s perception of what a brand

stands for.

Another driver is collaboration with partners. Starbucks controlled nearly every aspect

of the processing and distribution of its products. Its leaders pursued such a tightly-

knit structure in order to maintain control of the coffee beans, the people, and other

tangible and intangible ingredients that made up the brand. Starbucks keeps a good

relationship with coffee beans suppliers. And also Starbucks was the first to realize

4
the benefits of partnering when it reached out to powerhouse brands like Pepsi,

Barnes and Noble, Nordstrom, Kraft and United Airlines to create new products,

reach new customers and enter new channels of distribution like grocery, cruise lines

and the airline industry.

Technology also is an aspect of industry driver. Michelle Gass, Chief Merchant of

Global Product, Starbucks, and efficiency is a key driver in customer satisfaction as

customers “want their beverage in three minutes.” Since Starbuck introduced

automatic coffee machines. But Schultz realized these machines will dilute the coffee

experience. But the in store wireless coverage is strengthening the customer

satisfactions.

SWOT analysis

After a brief review of the industry, SWOT analysis and Michael Porter five forces

model are methods to better appreciate Starbucks’ competitive advantage and to make

strategy recommendations.

Strengths:

1. Starbucks is profitable company in financial market. Its financial performance and

profitable capability is the attraction that can generate more investments during

innovation and market expansion.

2. Brand recognition globally. Starbucks logo is one of the well recognized in the

world. Customers know this brand, and they know they can have brewed coffee

5
 and comfortable environment in Starbucks.

3. Power of suppliers: Market dominant position. As a market leader, Starbucks is

enjoying privileges. It has the biggest market share, controls the many resource

and it usually makes the rules.

4. A good corporate image. Starbucks commits its business activities under a strict

corporate social responsibility. It helps and supports the partners to achieve higher

goal not just business achievement. Because Starbucks is such a leader in coffee

industry, the customers will have bigger expectation to it than other companies.

Starbuck need to handle this buyers’ bargaining power well.

Weakness

1. Profit generating ability slow down. Although Starbucks is making money, but the

margin is not as significant as usual.

2. Market imbalance. Starbucks’ revenue is largely depending on the domestic

market.

Opportunities

1. The emerging markets. Countries like China, India, Russia, and South American

region have great potential for Starbucks global expansion.

2. Alliance. Starbucks can gain more market share with the collaborations with its

partners.

6
3. Innovation. With a strong R&D ability and abundant funds, Starbucks can keep its

market leader position when its innovation attract more customers.

Threats

1. Existing competitive rivalry: The intense competitions from competitors. Not all

the competitors want to be market followers, the competitions with them are

inevitable.

2. Threat of new market entrants: the coffee market in United States is mature; but in

other emerging countries, market is full of entrants. Usually they are local chain

brands or family-run café.

3. Dilution of differentiation. Imitation and substitution are everywhere in the

market. Same products, even better in store experience. This is a tough challenge

to Starbucks.

4. Threat of substitute products: the coffee is the second large commodity in the

world. But the market is unpredictable, maybe the customers change their appétit.

Or the trends of drinking market become tea.

Core competency of Starbucks

Starbucks branding

 High quality

 Good reputation

 Responsibility

7
The quality of Starbucks comes from the ability to provide the excellent coffee

product, the excellent service and the excellent environment. Beyond the profitable

effort, Starbucks also get a good reputation for social responsibility. One of the most

important efforts should be: Starbucks provide a financial and educational support for

famers. As a fact Starbucks just purchase 1% of coffee beans worldwide the

contribution to the avenues will be small, but it will greatly influence the other

competitors.

Ability to innovate, alliance, adapt to the culture these sum of learning and skills.

 Product: adapt to the taste, adapt to the economic

 Service: maintain the customer loyalty.

 Environment: environment diversity.

Innovation is the driving force in the coffee industry. People ask for different product,

also the service should be much better than yesterday, and the environment should

tasteful. Starbucks is famous for its coffee but only the original coffee cannot exist in

the beverage industry. So product diversity is significant. In order to meet the different

need of the customer Starbucks provide bottle drinks, brewed coffee chocolate and

espresso beverages. Beyond the drink Starbucks also provide the food service. In the

economic down turn the product cost is higher than before Starbucks provide a $4

latte to meet the. Providing a seasonal drink “Indulgent Iced Lattes” as a new product

8
come out to defense the market share from McCafe and some other brands. In the

international markets, especially China and India, tea drinking is a culture. How to

adapt the culture will be a great step for Starbucks. Brand expansion will be the best

solution to the questions. Starbucks come out with the product Starbucks green tea,

Starbucks red tea.

In the environment area, in 2001 Starbucks has introduces high-speed wireless

internet access in select store locations. Nowadays all Starbucks get its own wireless

or public wireless service in the Starbucks environment. Starbucks branch into the

world of media with offerings in music, books, and movies to enhance the experience

Starbucks provided. Starbucks lunches an in-store CD burning service for creating the

“Starbucks Hear Music” alliance with XM Satellite Radio and Apple iTunes.

Starbucks believes a coffeehouse should be a place to find connection. And it should

fit seamlessly within its neighborhood; its environmental impact should be as minimal

as possible.

In different culture background Starbucks design its coffee store in different ways

 Concentrate: the original Starbucks environment

 Fragments: adapt to the culture design with the local taste

Starbucks’ store designs are rooted in their coffee heritage, and in our Starbucks™

Shared Planet™ community involvement and environmental stewardship goals. So

the designs reflect the character of a store’s surrounding neighborhood and help

reduce environmental impacts.

9
Value creation

Starbucks Company should consider three kinds of major groups: customers,

employees and share holders. How to balance the benefit of these three groups and

maximize the profit of the company will be the main objective.

As known value=benefit/cost. It's a conman sense that most people want low cost but

high benefit. For Starbucks company should revolutionize their industry by creating a

different value proposition.

Howard Schultz said the company will have to innovate and provide more value to the

customer. The Starbucks customers can enjoy coffee, the sense of the community, the

sense of humanity in Starbucks stores, and Starbucks will be willing to be promoted

as the third place between home and work.

Coffee shop highly depend on part-time employees, most worker require some

particular skills. Many employees just above the minimum wage, also the coffee

retailer industry has an average of 80% turnover these days. Starbucks supply an

excellent environment to the customer and the employee at the same time. Starbucks

took care of its people Starbucks has its concept to treat its employees with respect.

They provide the health-care coverage to all employees who worked more than 20hrs

per week. And in order to provide an excellent service Starbucks has a training

program for the employees.

10
Starbucks can boost its financial performance by cutting back on support to some of

the shareholders. But in the long run “do the right thing” will lead to the success of

financial finally. Perseverance will be important in this situation. Stretch and brand

expansion is the only way to deal with the profitless situation. As we know Starbucks’

promotion way is heavily located in the cities. For example in Well Street just a feel

meters far away customers will see another Starbucks coffee. But in some countries

there is no Starbucks coffee. Starbucks need to learn that they are no more monopoly

in customer’s concept. So resource reengineering should be implemented in the cities

which there are too much Starbucks coffee store, resource reinvention in other cities

or countries like India. Starbucks need to teach the potential customer the coffee

civilization its ingredients quality different. This could be beneficial for developing a

relationship with the customers and make loyalty to the Starbucks brand. Furthermore

the education would motivate coffee buyers to pay a higher price to the better

products.

Recommendation

Starbucks is now leading the market in coffee by following a differentiate strategy.

They also created a good brand image which made people to see them as a brand

higher than its competitors, they differentiated their products in quality and innovation

in many new products their differentiation strategy also involved in choosing the right

place and location for their store having thousands of stores worldwide with good

11
infrastructure, sophisticated seating’s and number of other facilities to satisfy their

customers they were able to differentiate themselves from their competitors.

In the strategic analysis, Starbucks was very successful up to date, because till now

they have created a good brand image and they acquired the huge market share by

following different demographics and they were also able to change the customers

view towards coffee. They created thinking in people that coffee is not just only a

drink but they made people experience the real feeling of coffee by following

different strategy. Starbucks only deals with products which are related to coffee and

retail stores so the business level strategy of star bucks is very similar to corporate

level strategy. So the corporate strategy of Starbucks is to make itself the premier

supplier of finest coffee in the world. But Starbucks even though they grow very

rapidly they never gave up on their principles, which were they managed to maintain

and give their employees in its retail stores a good working environment.

Horizontal integration

“The acquisition of additional business activities at the same level of the value chain

is referred to as horizontal integration” (Mark N. Clemente and David S). Starbucks

followed the strategy of horizontal integration when they bought Tazo and Lcc to

enter into the tea market, Since they were their competitors. This strategy is

diversifying into many products. This made them increase their profit level because

people always need a change and this made them different from others.

12
They also followed a strategy of expanding themselves by diversifying into unrelated

products to cover the entire market .like they launched star bucks prepaid card, in

1994 they started selling CDS in stores and by 2005 they were selling over 3.5 million

CDS over a year, and they also started to sell books and DVDs in their stores .To

make themselves strong they partnership with apple iTunes to survive in the music

market.

So Starbucks should continue doing horizontal integration into coffee and food related

products and should reduce diversifying into unrelated products because this might

hamper the brand image (coffee company).

Vertical integration

“The degree to which a firm owns its upstream suppliers and its downstream buyers is

referred to as vertical integration. Because it can have a significant impact on a

business unit's position in its industry with respect to cost, differentiation, and other

strategic issues, the vertical scope of the firm is an important consideration in

corporate strategy” (Greaver, Maurice F). From the coffee bean farms to the finished

products in their cafes, star bucks involves itself in every process in order to provide

their customers their best quality products which they serve in their cafes .Starbucks

should not involve themselves in every aspects because it involves huge cost and time

.They should limit themselves to the important aspects and concentrate on their core

13
competency of coffee making.

Pricing strategy

Starbucks is a high end premium coffee brand and they charge high prices for their

coffee and other products. As they provide high quality coffee and extraordinary cafes

with many facilities the consumers are ready to pay such high prices. But when they

expand internationally in some countries 6$ can easily fetch a whole meal .so

introducing such prices in those countries will not work effectively .in fact one of the

reasons why they could not enter into the Indian market is their high pricing strategy.

Human resources

Starbucks recruited employees who had good abilities to work as a team and made

sure that they could be adaptable. So they gave intensive training to their both full

time and part time employees which other competitors were not capable of. They

always motivate their employees to give full service to their customers to satisfy them

.They treat employees as the best assets in the organization, Starbucks should follow

same strategy towards their employees to make them work more effectively and could

even add more promotions and other benefits which can even motivate them more and

they should keep following this in future.

14
Marketing strategy

The marketing strategy of Starbucks is mainly their positioning strategy where they

made their place attractive where people come there for relaxation where it was

considered as a place after home and work. Starbucks they never advertise much on

media or others they mainly concentrate on advertising on their stores and lots

through print medium since they always target customers who are educated and read

lots. In 2005 their advertising expense was 87.7$ million and 1.4% of their revenues.

So Starbucks followed a good marketing strategy and they should mould their strategy

towards pricing in order to enter different markets.

Expansion Strategy

United States has always been star bucks largest and most profitable

market .Starbucks expected its future revenues to come from outside the USA. The

three year geographic expansion strategy of Starbucks was in 1992 and 1993 where

they targeted places having favorable demographic profile, even from a day to day

operations perspective. A large city was selected as a hub in which a team to support

the goal of opening twenty over stores was identified. Demand in particular hubs was

a major driver which fuelled star bucks expansion strategy. By pursuing this

expanding strategy Starbucks steadily increased its international stores from 1200 in

2001 to over 4300 by 2007.

15
The Starbucks expansion strategy had a powerful impact on employees coffee farmers

and coffee growing industry. As they expanded rapidly their partners were benefited

more and even the coffee producers were paid much more than the market price this is

to satisfy the farmers and incentivizing them to maintain the quality standards of their

coffee beans. Starbucks had a positive impact on the farming community. Due to their

expansion strategy star bucks created more jobs, more demand for coffee and other

inputs purchased from suppliers .hence it played a vital role in improving the quality

of living for the suppliers .star bucks expansion strategy was supported by its stake

holders because of its implications for the firm’s stock.

Starbucks focused mainly on partnership for their international expansion then the

countries. The international strategy of Starbucks also involved in targeting on small

countries which has the significant potential to grow ,their international strategy also

involved in to consider different peoples culture ,taste and preferences. Like in United

States most of their orders were take away, where as in China even though people did

not like the bitter taste of coffee they still visited the stores frequently because they

liked the image and it was a good place for them to relax. Starbucks offered different

countries with the product according to their culture and taste for example in Austria

Starbucks offered smaller cookies and muffins with less sugar but they still retain with

their core drinks and their no smoking policy even though they know that 40% of the

Europeans smoked this is because of the trade off between the customization and

consistency which they had to take care to establish globally.

16
We recommend that Starbucks should do more differentiation strategy in order to

sustain their market share in future also. They should also even work towards

reducing the production cost so that they can reduce the price and can even enter

markets with low cost in order to increase their profit. According to analysis,

Starbucks to enter into new markets like India market should have a strategic alliance

with cafe coffee day or barista since coffee day and barista have a efficient network

throughout India By doing so Starbucks can save on their initial investment for this

venture and leverage on the market expertise of a local player like coffee day or

barista.

Potential fallout

The Starbucks potential fallout is the competitors of Starbucks can easily copy their

strategy and take over its market shares. That means Starbucks will face more

competition in future and lack of funds to solve the competitions.

In such case, Starbucks needs to be more differentiate and innovative from their

competitors for example their products should be more creative and unique. Also

Starbucks needs to attract more funds from the stakeholders and investor. So that

Starbucks can invest this money to staff training, new product R&D, modify the

operation and optimize the organization structure.

There are two rules Starbucks can follow in the future to overcome the problems they

will face.

1. Never give up the market leader position in coffee industry.

17
Starbucks should never leave the leading position in coffee industry because it is

their core business and people know Starbucks through coffee only .if they leave this

position they will lose their brand image and even it will affect Starbucks revenue.

2. Be a pioneer in the new industry development.

Starbucks should look at constantly innovating its products and services so as to

consistently maintain a competitive edge over competition and to make it sustain in

future they should build an infrastructure or an installed base so that the latecomers

cannot duplicate it easily

In the future, Starbucks wants to sustain, it should keep learning to maintain its core

competence and maximize its competitive advantages.

18