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Starbucks was originally based in Seattle, and was established 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 process and business strategies? It is time to make a decision.Today with more than 6,500 retail locations in North America, Latin America, Europe, the Middle East and the Pacific Rim, Starbucks Coffee Company established itself as the dominant and most aggressive retailer in the coffee house segment. The company was able to transform a simple beverage into a lifestyle accessory with as much elegance as the latest fashion
(Starbucks.com). It offers whole bean coffees, espresso beverages, confectionery and bakery items and equipment in its retail stores. The retail strategy has been to put a coffee shop on every corner and to make fresh-brewed coffee by selling only the highest-quality products and charging a premium price. However, the product mix has changed significantly over the years, with beans accounting for about 15% of the chain's sales. Meanwhile, Starbucks also expands its offerings with a line of ice cream for supermarkets and a joint venture with Pepsi Cola to market, frappuccino. The quality of the product has attracted a loyal and growing following among consumers. Strategic Vision ―To establish Starbucks as the most recognized and respected brand in the world.‖ Strategic Objectives They wanted to have 15,000 stores by the year-end 2005. They aimed to provide a great work environment and treat each other with respect anddignity. The y bel i eved in t aki ng on di versit y as an essenti al com ponent i n the wa y t he y do business. To apply the highest standards of excellence to the purchasing. Roasting and fresh delivery of coffee. To develop enthusiastically satisfied customers all of the time. To cont ribut e positivel y t o t hei r com munit i es and envi ronment , and reco gni ze t hat profitability is essential to future success of business.
Key Elements of Starbucks’ Strategy
After going through the case study we found that Starbucks did a lot to bring the innovation in strategy throughout its journey from 1971 to 2004. We will be discussing the strategies and its elements in our document. Below, we just have a glimpse of these:The restaurant/store concept * The offering of Innovative product line * Differentiation from competition * National and international expansion * Distribution channels (Pepsi partnership/online store/Dreyer partnership) * Efficient Financial management (Centralized Information Systems) * Capitalizing on enhancing the people element * Engaging in social responsibility programs (CARE).
Competitive Advantages or Differentiators Their differentiating elements are as follows:* They were the pioneers to introduce espresso bar idea in USA * Mail order sales
In upcoming text we are going to put light on these elements i.e. “H ow Starbucks managed to move with the dynamic environment which is the basic need for any business to survive”.
Store Concept Starbucks started with the concept of retail coffee store but later on due to the entrepreneurial itch of Howard Schultz they entered into restaurant business which was the addition to their retail store concept. This restaurant’s idea came from Schultz’ trip to Milan, Italy where he visited espresso bars. The theme behind this idea was to provide special sitting areas where families and friends could sit together and enjoy chit chat holding a cup of coffee with Baristas performing around to cheer and entertain them. Moreover, they made a strategy to attract the professionals by adding a facility of Wi-Fi in their stores. In short, they created the ambiance of stores in a way that could make customers’ feel pleasant. Product Line or Offerings The offers are as follows: Fine coffees Exotic teas Dark roasting coffees (Coffee beans) Italian style hot and cold espresso drinks Hot and iced teas Fresh pastries Juices
Coffee making equipments Coffee mugs Music CDs.
Competitive Advantages or Differentiators
Their differentiating elements are as follows: They were the pioneers to introduce espresso bar idea in USA Mail order sales Word of mouth marketing Employee motivation strategies to attain improved employee commitment Convenient distribution channels
Introducing chemical free cultivation process.
Expansion To expand the business they worked on three areas which are elaborated below:-
Idea They expanded their business idea by moving towards the restaurant business from a retail coffee store.
Geographical They started with expanding the business outside Northwest Pacific i.e.
in Chicago, California, Los Angeles and Portland. For this particular aim, Starbucks made zonal ―Hubs‖ in which they hired Vice Presidents to induce the culture of Starbucks in newly opened stores. After their success of this little geographical expansion, they began to enter into the international market
andfor this purpose the y brought local license hol ders i nt o the part nership t o c ontrol busi ness activities in their relative regions.
Product Back in 1971, they started with Fine coffees, Exotic teas and Dark roasting coffees (Coffee beans). Later on they expanded the product line by adding Italian style hot and cold espresso drinks, Hot and iced teas, Fresh pastries, Juices, Coffee making equipments, Coffee mugs and Music CDs.
Distribution Channels One of the expansion strategies was to do the joint venture with PepsiCo in 1994. The purpose of t his venture was t o use the di st ri buti on channels of P epsi Co whi ch were conveni ent so that Starbucks’ distribution channels could also become convenient eventually.
Financial Management Schultz asked for the ―Centralized Information Systems‖ to have a check and balance on sales in thousands of stores around the world by keeping the back up of transactions. Another strategy which they adopted was to convert the form of business from partnership to Private Company which opened the doors for raising firm’s capital.
Human Resource Management or Personnel Management Following are the efforts they did to achieve employee commitment:-
Starting Health Care Program for permanent and part time employees as well
Stock Purchase Plan (Employees could buy shares at discounted rates)
Stock Option Plan (Shares were offered on 12-14 percent deduction of basic pay)
30 percent discounted products.
Meeting the Social Corporate Responsibility Measures Starbucks did few efforts to meet its social corporate responsibility measures: In 1991, they organized concerts to sponsor CARE (The world relief organization) In 1995, they provided financial assistance to Agricultural Improvement Projects In 1997, they provided technology to the coffee growers of Guatemala. In 2002, they started Green Store Task Program which was to reduce, reuse and recycle the wastes.
Five Forces Analysis
Substitute product Minor pressure building
Suppliers’bargainig power Glad to supplyinputs
Exerting weak pressure
Bargainingpower of buyers Higher level of attraction
New entrants High entry barriers
How did they evolve? At t he earli er st ages t hey prom ised t hemselves t hat t hey wi l l not l eave even a s ingl e s tone unturned to make Starbucks the most recognized and respected brand in the world. Therefore, t he y t hought t hat thi s could onl y be possi bl e i f the y w i l l devel op t hese st rat egi c obj ecti ves because these are basis to earn the respect and fame for any business.
Mission Statement ―To inspire and nurture the human spirit— one person, one cup,and one neighborhood at a time.‖
Our Opinion This mission statement along with strategic objectives provides a focus for employees as they make strategic decisions. It not only supports the employees, but supports the customers as well, making a note that they should be satisfied all of the time. The mission shows alignment with the vision by stating how the company plans to reach the broad goals set by the vision. Another supporting sentence of strategic objective aligned with the mission statement shows that the ―com pany appl i es t he hi ghest st andards of ex cell en ce to t he purchasing, roast ing and fresh delivery of its coffee‖ which supports the idea that Starbucks uses the best available resources to give it a recognized and respected name.
Grade A- to Howard Schultz We deducted his marks a bit because he left the spaces in the area of marketing as he did not spend adequate budgets on advertising and product innovation. Last but not the least is that he did not attempt to study the environment properly while entering into new geographical areas e.g. he opened a store down street in Chicago which was not a good idea due to cold weather conditions. On the other hand, this higher grade to him is due to the reason that he did not leave the space for us to give too many recommendations.
Control of Major Cost Categories In this portion we have analyzed that how Starbucks controlled its fixed cost. If we talk about the locations, it was very expensive to purchase land and then develop it as a store, so to overcom e this probl em St arbucks st arted leasi ng t he l and for l ong t erm periods . In our opinion, it was a quit impressive move to cut down its fixed cost. Secondly they observed that to get the license was too costly for them, so they made contracts with the partners who had license with them.
Financing For the financing, Starbucks instead of taking loans preferred raising the equity. It was a better idea to generate capital because they did not have to pay any short term and long terminterests against the borrowings.
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What were the key issues faced by Starbucks in 2004?
Every company faces major challenges, even companies that are as successful as Starbucks. Although they have an outstanding reputation, have won many awards like top sustainabler e t a i l s t o r e a w a r d a n d m o s t e t h i c a l c o m p a n y a w a r d e t c , a n d e v e n g i v e b a c k t o t h e i r community, they are still facing challenges like any other company. Following are the most obvious challenges that Starbucks is dealing with:-
Schultz was overflowing with the ideas for the company, early on he noticed thatfirsttime customers sometimes felt uneasy in the stores because of their lack of knowl edge about fi ne coffees and because st ore emplo yee s som eti m es cam eacross as a little arrogant or superior to coffee beginner. Howard Schultz when came back from Italy shared his ideas for modifying the form at of St arbucks’ st ore wi th Bal dwi n and Gordon Bowker. But i ns t ead of winning approval for trying out some of his ideas, Schultz encountered strongresi st ance but aft er a year S chultz succeeded i n wi nni ng t h e appro val from Baldwin and Bowker. After sometime Baldwin and Bowker again went against the ideas of Schultz so he becam e so frust rat ed and l eft S t arbucks i n l at e 1985 to open his own s eparat e Espresso Bars in high-traffic down town locations. Schultz acquired Starbucks in 1987 and after the 20 months of acquiring, some employees felt unappreciated that there was a feeling of prior management had abandoned t hem. S o, S chul tz decided to m ake bui ldi ng a new
rel ati onship of mutual respect between employees and management.
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Starbucks lost its money when it expanded market to Chicago because in Chicago that was the first downtown store opened on to the street rather than into the lobby o f t he building where it was l ocat ed; i n the wi nt er m ont hs, custom ers were
hesitant to go out in the wind and cold to acquire a cup of coffee. It was expensive to supply fresh coffee to the Chicago stores from Seattle warehouse. The challenge to Starbucks, in Schultz view, was how to attract, motivate, and reward store employees in a manner that would make Starbucks a company that people would want to work for and that would generate enthusiastic commitment and higher level of customer service. A val ues and pri nci pl es ―cri si s‖ arose at S t arbucks in 1989 when cust om ers starting requesting nonfat milk in making Cappuccinos and lattes (an espresso coffee with frothy steamed milk) So, Starbucks started selling both fat milk and nonfat milk Cappuccinos and lattes. The y were facing t he issue of W i -Fi (wirel ess i nt ernet service) in 20 02, t he number of accesses was in the millions by T-Mobile; internal research showed that
t he average connection l ast approxi mat ely 45 m inut es S o, in Oct ober 2 0 0 3 ,Starbucks announced that they will expand Wi-Fi capability to additional locations and would have 2700 stores equipped with wireless Internet access by year end. They were also facing challenges from their competitors. In 2003 there were an estimated 14000 specialty coffee outlets in the United States but they were not competent enough to exert pressure at Starbucks.
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What recommendations would you make to Howard Schultz to sustain thecompany growth and support strong financial performance in t he yearsahead?Recommendations
After analyzing the whole case study, we became able to give few suggestions to Howard Schultz whi ch can be handy t o sust ai n t he growt h and support st rong financi al perform ance in t he forth coming years:-
He should spend more budgets on advertisement of products. He should bring innovations in his products because we saw in this case study that he was inspired by espresso bars so he imitated the whole theme of Italian espresso bars and the idea of dark roasted bean was an older one as well. Before entering to any new geographical region he should study the market environment of that particular region as we saw that at Chicago there was an issue of cold weather and his store was at down-town-street. Furthermore, the labor rates and rents of building were higher as well. At the stores Starbucks’ technique to teach customers about how to make coffee was not a good idea because i t does not support thei r busi ness m odel . Therefore, i t should be avoided in future. Above elaborated things were having details about the strategies of Starbucks which drove it for the Global dominance till 2004. Starbucks is in fact the recognized and respected brand in the world and if it can overcome the shortcomings which we identified then nobody can create bother for it to be successful and there will be no point left as a mistake on its part.
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SWOT Analysis of Starbucks.
Strengths • More appearance to customers. • The ore products and services offered, the more time a customer will stay thus there will be more possibility of spending money and drinking coffee • Starbucks Corporation is a very profitable organization, earning in excess of $600 million in 2004.The company generated revenue of more than $5000 million in the same year. • It is a global coffee brand built upon a reputation for fine products and services. It has almost 9000 cafes in almost 40 countries. • Starbucks was one of the Fortune Top 100 Companies to Work For in 2005. The company is a respected employer that values its workforce. • The organization has strong ethical values and an ethical mission statement as follows, 'Starbucks is committed to a role of environmental leadership in all facets of our business.'
Weaknesses • Additional Overhead Costs. • There would be additional manufacturing costs and threats from the competitors that already serve the new product line. • Starbucks has a reputation for new product development and creativity. However, they remain vulnerable to the possibility that their innovation may falter over time.
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• The organization has a strong presence in the United States of America with more than three quarters of their cafes located in the home market. It is often argued that they need to look for a portfolio of countries, in order to spread business risk. • The organization is dependent on a main competitive advantage, the retail of coffee. This could make them slow to diversify into other sectors should the need arise.
Opportunities • Percentage of potential markets will increase. • There is a possibility of increase of customers from the non-coffee drinkers market. • Starbucks are very good at taking advantage of opportunities. In 2004 the company created a CD-burning service in their Santa Monica (California USA) cafe with Hewlett Packard, where customers create their own music CD. • New products and services that can be retailed in their cafes, such as Fair Trade products. • The company has the opportunity to expand its global operations. New markets for coffee such as India and the Pacific Rim nations are beginning to emerge. • Co-branding with other manufacturers of food and drink, and brand franchising to manufacturers of other goods and services both have potential.
Threats • Competitors may also use advertising to compete. • Possibility of low penetration to non-coffee drinkers market
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• Who knows if the market for coffee will grow and stay in favour with customers, or whether another type of beverage or leisure activity will replace coffee in the future? • Starbucks are exposed to rises in the cost of coffee and dairy products. • Since its conception in Pike Place Market, Seattle in 1971, Starbucks' success has lead to the market entry of many competitors and copy cat brands that pose potential threats.
STRATEGIES • Diversification of product: Offering new products and new services • Aggressive Advertising
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DIVERSIFICATION OF PRODUCT With diversification strategy, Starbuck’s can offer products that can serve as substitute for snacks or even meals. With it, the customers will be more inclined to stay and will have less excuse to leave. The customers will be spending more time at the shop thus there would be more chances that they can spend more money and this can be good for the financial performance of the company.. For non-coffee drinkers that will enter the shop to purchase its other products that are offered there will be attracted to the aroma of the coffee.
LESSONS LEARNED After analyzing the Starbuck’s history and all the strategies applied, the group learned that in doing business the businessmen or the owners must have the same mission and vision for them to succeed because if not, their ideas will be conflicting with each other and therefore will not lead to unity of the courses of actions that must be done in order to achieve progress in their business. Another thing is that the owners must not be afraid to take risks. In the line of business of Starbuck’s, knowing how it attained its current position, it shows that if you won’t be brave enough to take the risks, nothing will lead you to any progress. Schultz took all the risks in order to achieve its vision which is to be the number one in their industry and because of this, because of his strong determination, he was able to succeed. Having a corporate responsibility is also one of the things that the case has imparted with the group. ― if the economic status of the business is high, its responsibility must be equal to it, if not, your economic status will be lower in accordance to the rule that the economic status will be always proportionate to the responsibility that it takes.
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The last thing that the group realized is that in doing business, you must care for everyone that consisted it, especially the employees. The employees serve as the blood of the business because of the service for the customers that they are doing. Giving better benefits for them, like what Schultz did is good for the employees and for the business also because it earned the trust of the people, thus the customers receives better quality of services from them creating a better image for the business. All of these are the lessons that the group learned while doing the case. It seems to be few but if applied appropriately, it will mean a lot.
FORESIGHTS After analyzing the case of Starbuck’s, knowing its present position and some of the internal and external forces, it is very evident that the diversification strategy resulted to a great progress for the company. Because of the other products aside from coffee that it offered to the customers, it is very obvious that it reached its vision of being the number one in their line. Others may say that it deviated from its mission which is ―To establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining uncompromising principles while we grow". But if you will look deeply, the diversification that Starbuck’s did is a kind of related diversification, meaning, the things that it offers aside from coffee are those that the customers may need to enjoy the coffee even more. The pastries goes along well with coffee, sure thing there are some beverages aside from coffee but the point is its main product is still coffee and that is where the business still concentrates.
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1. ―Strategic Management, concepts And Cases‖, 2. Thomson Arthur A, Strickland A.J. III, 3. Tata McGraw-Hill Publishing Company Limited 4. Crafting and Executing Strategy by Thomson Arthur A., Amit J. Shah, Thomas F. Hawk
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